New Chancellor of the Exchequer Rachel Reeves’ first budget will be published at the end of October and, while rumours are already circulating about what it will contain, we have identified three key areas the Government will be focusing on when it comes to people’s investment and savings.
Simplifying ISA
At a time when the Government faces significant fiscal constraints and “good news” is scarce, ISA simplification provides an opportunity to announce consumer-focused reforms that will benefit investors and the wider economy.
As a first step, the Government should merge the UK’s two most popular ISAs, Cash ISA and Stocks and Shares ISA, reducing the complexity of making up-front choices and creating a more flexible system that allows consumers to move easily between cash savings and investments.
According to HMRC data, there are around three million people in the UK who have more than £20,000 invested in a cash ISA and no investment in a stocks and shares ISA – if just half of that money was invested long-term, an additional £30 billion could be made available.
Given that around half of the ISA assets on AJ Bell’s platform are invested in UK companies or UK-focused funds, domestic companies should disproportionately benefit as a result, and the additional private investment could deepen liquidity and boost valuations of UK companies.
Pension tax
The government has made no secret of the need to eliminate what it says is a sudden £22 billion surplus in the public budget. But before jumping into solutions it needs to think carefully about the implications. This is particularly true on pensions, where the temptation to tinker should be resisted.
The opposition Labour Party had indicated it would reverse the abolition of lifetime allowances, but appears to have accepted that this is neither practical nor sensible.
Pension savers will be hoping that Mr Reeves will take a similar approach to other elements of the pension tax system and resist using pension tax credits to increase the government’s spending power. Such a change cannot be introduced easily or simply. Far from simplifying pension tax credits, it would introduce significant new complexities for all pension savers, employers and HMRC.
Enforcing pension tax would paint the government in an extremely unfavourable light and send the wrong message to savers.
We welcome the Government’s commitment not to make fundamental changes to pension tax. We need to create a stable environment where pension savers can trust that the system in which they are saving is stable and predictable.
Lifetime ISA
Simplifying ISAs should be a priority for the current Government and steps could also be taken to make existing lifetime ISAs more attractive.
Helping people to buy a home is a clear priority for the new Government and the Treasury should fix the design flaws in the Lifetime ISA and make it as attractive as possible for prospective homebuyers.
Most obviously, the 25% early withdrawal fee, which effectively acts as a 6.25% exit penalty, is deeply unfair and punishes people whose changed circumstances prevent them from pursuing their homeownership dreams. Reducing this to 20% and simply returning the Government’s upfront payment bonus would be a simple, low-cost reform that would benefit young people.
The government should also consider raising the minimum property purchase price, which is currently £450,000, to reflect the rise in house prices since LISA was introduced seven years ago.
Disclaimer: These articles are for informational purposes only and do not constitute a personal recommendation or advice. Tax, pension, ISA and LISA rules apply and may change in the future.
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