ISA tax breaks for savings: cap them at £15,000

The combination of being in government and of facing a large deficit means the list of tax increases and spending cuts Liberal Democrats have been calling for over many years has been mostly exhausted. Capital gains tax is up, pension tax breaks for the richest has been curbed, the ID cards database is gone and so on.

It is good that so many policies are now in place and there are plenty of political battles still to come in the second half of this Parliament, especially over mansion tax. However, it means that the scope for the party to say ‘here is how we would do things differently’ or even ‘here is how we would find the funds for our priority projects’ will be increasingly limited unless the party does come up with new policies that free up money.

So here is one suggestion, that would raise around £1bn per year: put a £15,000 limit on the total amount people can hold tax-free in ISAs (Individual Savings Accounts).

There are two problems with the current tax breaks for ISAs. First, by having an annual ‘use it or lose it’ allowance, the ISA tax breaks disproportionately benefit those who can afford to put in the full tax-free amount every year. If you are very well off you can shelter £11,280 from tax this year, and then the same again (or more, as the allowance is usually increased each year) next and then the year after and so on for ever.

In other words, if you can afford it, you can build up huge levels of tax-exempt saving. What’s more, if you take some of the funds out at any point because you need them, you then lose that part of your allowance. That makes the rules doubly beneficial for the most well-off who can cope with the events life throw up without having to call on their ISA savings.

With pensions there is a lifetime limit on how much you can put into a pension scheme and still receive tax relief; there is no such limit for ISAs. Instead, with ISAs we have a tax system that ends up benefiting more and more the most well off.

The second problem with ISAs is an economic one. The predecessor to ISAs, TESSAs, was introduced by John Major because at a time of economic over-heating he wanted to get people to switch from consumer spending to saving, providing a tax break to encourage this. However, the economy is now in a very different situation.

There is a problem of low long-term pensions savings, but the introduction of the new auto-enrollment pension schemes is the answer to that. There is a problem too of high consumer and housing debt, but paying off that debt rather than saving into ISAs is the better route for people to take. There is also a problem of consumer spending being too sluggish during the current choppy economic recovery, which is what makes the generous ISA allowances currently so ill-suited to our needs.

The solution? Introduce a £15,000 limit of the total ISA holdings people can have. That is a generous enough number not to get in the way of the sorts of levels of savings that most people can look to put away, and means people can benefit from ISAs for short-term saving needs. But for richer people it would encourage them to spend rather than save, which is what the economy needs. For both groups, limiting ISAs does not make pension saving less attractive nor does it hinder paying off existing debts. It would also be a much fairer solution than the current rules, which give more to those who already have the most.

The Social Market Foundation estimates that it would save the government around £1bn a year, money which can then be put to better use. It is a simple and sensible policy we should adopt.

 

* Mark Pack is Party President and is the editor of Liberal Democrat Newswire.

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36 Comments

  • John Richardson 24th Apr '12 - 8:19am

    A £15K limit sounds kinda pointless for a long-term savings product. You couldn’t even save enough to buy a new mid-range car never mind put together a retirement plan.

  • Better to abolish them altogether – even at £15k they benefit the rich, and they are a tax complexity! The economically sensible option is to allow the first 2% of any savings account to be tax free – this is just covering (typical) inflation (see Mirrlees for more details).

    John/Guido – you have misread Mark – he is saying that ISAs are NOT used for pensions, so this reform will not affect pension savings. (Mark – there is a de facto lifetime ISA limit – life expectancy x annual limit, which is still lower than the pension limit).

    The £1bn saved could be used, for example, to raise the starting point for National Insurance contributions. This would be pro-work, and progressive.

  • Richard Dean 24th Apr '12 - 10:29am

    Ian’t it just wonderful to be able to charge through the financial china shop like this, grabbing a billion here and another there, ending up with such easy apparent solutions to that nasty hard fact that the government hasn’t got enough money?! If only everyone could do this, all problems wuld magically disappear!

    Or would they? Removing the tax breaks will mean that all that money may move away from where it is now and into something else. Where is it now? In long-term savings, which means it’s been invested somewhere and is supporting something. Take the £1 billion tax breaks away and you could do £10 billion of damage as the money moves.

    Paying off high consumer and housing debt would only be a better route if you have both an ISA and the debt, and if the debt interest was more than the ISA benefit. Is this really a solution for people who have debts but no ISAa!

  • ISAs make very good alternatives for those of us without decent corp. pension schemes and who would rather not pay the stupidly high maintenance charges on a general high street pension scheme.

    If your really interested in making those doing better pay perhaps it’s time to re-introduce NI contributions for those over 65.

  • Not a bad idea but the limit is too low. Set it at the average deposit price for a house (£30k) to help first time buyers. Remove the yearly limit as well – you want to incentivise people to save as much as they can to get on the housing ladder. Plays to the intergenerational equality line that we should be taking now.

  • As has been pointed out, this would penalise people who save for their retirement through ISAs rather than through a pension scheme. In that context a £15K limit would be ludicrously low – about 1.5% of average earnings over a working lifetime.

  • Mark Valladares Mark Valladares 24th Apr '12 - 12:06pm

    CC makes a very good point, in that there are those who have deep suspicions about the personal pension industry – the same sort of people who came up with endowment mortgages, to take but one example – who are much more comfortable with investing in their ISA rather than pay some of the inflated management fees charged.

    You could have a combined limit for ISA and pension contributions instead of a £15,000 cap for ISAs, but whilst I see the superficial attraction of a cap, I can also see the strategic advantage of encouraging a saving ethos, as it will benefit the State in the long term if people make their own provision. And I tend to think that the latter far exceeds the former.

  • ISAs are currently the only place you can save some money, without locking it for years (or permanently like with a pension), and still keep up with (or close) inflation. At least for small savers. (I’m talking about Cash ISA here).

    £15000 isn’t that much money.. whether you save it for a deposit, or already own a house and might need urgent big repairs, or simply to cover yourself in the case of unemployment.

    And for those of us that change jobs often or are in temporary employment, it’s a much better option than a pension, which has both costs, and the inability to access it in an emergency. I know I will opt-out of the auto-enrolment pension because of those reason (plus the fact that I know my temp agency will contribute nothing to it and I’d rather have control of my savings).

    Well-off people might benefit from ISAs, but so do not so well off people that manage to and are prudent enough to save.

    the one cap on the other hand that could apply to ISA to not benefit higher earners as much is to cap the tax relief at the base rate (assuming that’s not already the case, I don’t know, I’ve never earned above the base rate nor will ever do.. in fact I barely reached the threshold for paying income tax at all this year!))

  • This is a seriously, seriously, seriously bonkers idea.

    It is predicated on the ridiculous view that ISA-users are wealthy. They are not.

    I have not been able to work full-time for over a decade, and had to leave my company’s additional pension scheme. My accrued benefit was handed back to me and has been protected (barely) by the use of ISAs. To label me as wealthy is absurd!

  • On the contrary, the fundamental problem with pension schemes is that they only work well for fairly dull careers with final salary schemes or matched/partially matched contributions. Everyone else looses out.

    They don’t work well for those with unmatched contributions, they don’t work well for those who’s careers mean they switch jobs every 2 -5 years, they don’t work well for those who may wish to found a business and would rather base it on savings than loans. They don’t work well for those who might sometimes need a chunk of cash and who would rather not use credit when they have the option of non credit (perhaps someone who currently walks to work who then needs a car for a new job).

    And they don’t work well for for those who view the annuity system as something likely to work against their or their next of kin’s best interest.

  • Mark

    Well, surely the liberal strategy would be to give people choice about how to save for retirement, rather than forcing them into a pension scheme – particularly in the absence of evidence that you _can_ fix the pension system to meet the difficulties people have listed.

    And if you must have a cap, why not have a combined cap for pension schemes and ISAs as Mark V suggests, and allow people the freedom to choose which to use?

  • This is not how ISAs work.

    If you contribute £11,280 to an ISA, that is NOT tax-exempt. Rather, the *earnings* you make are tax exempt. If you earn 7% – about £790 – that is all that qualifies for the tax exemption.

  • Alex Sabine 24th Apr '12 - 8:14pm

    I agree with some of the objections raised in the comments here, but would add a couple of general observations and several other points on ISA, savings incentives and tax breaks.

    1. Mark makes the important point that the fact that a number of long-standing Lib Dem budget priorities have been, or are in the process of being, implemented creates a need for fresh thinking. On the revenue side, I hope (though I can’t say I’m particularly optimistic) that it will lead to the development of a more strategic view of how the tax system as a whole ought to be reformed, and to a coherent general philosophy of taxation from which specific proposals might follow – rather than a process of scavenging around for an ad-hoc collection of wheezes to claw back money from some groups and give it to others with little regard for how that leaves the overall state of our already over-complex and often economically perverse tax system.

    In particular, there needs to be greater recognition of the (economically uncontroversial) point that there is often a tension between efficiency and equity in taxation, and that equity requires not only a focus on income/wealth distribution but also horizontal equity (consistent treatment of people in broadly similar circumstances), inter-generational equity, transitional equity, avoiding arbitrary or retrospective action by HMRC and a number of other considerations. In short, less vote-grubbing populist tinkering and more strategic thinking – at least in the medium term, good economics can be good politics.

    2. A similarly strategic approach is required in relation to public spending. One of the disappointments of the current period of deficit reduction is that, while the coalition is making the necessary downward adjustment to the ratio of spending to GDP to restore some sort of sustainable balance in the public finances, it is doing so without having undertaken a root-and-branch audit and rethink of what government does and why (which the Canadian Liberal government of the 1990s did, for instance). Instead it is accepting the scope, structure and contours of the state largely as defined by Gordon Brown, while bearing down on the costs as best as possible.

    Perhaps this was inevitable owing to ideological differences on the role of government between the coalition parties and the need to put in place a credible deficit reduction plan as soon as possible after the election; but I’m not convinced these are good enough excuses. In any case, given the upward pressures on spending on healthcare and pension spending linked to the ageing population, a more strategic approach will be required to ensure sustainable finances over the coming decades, as recent reports by the OBR and the OECD have highlighted.

    Thus, a striking feature of the coalition’s deficit reduction is that it ring-fences areas which enjoyed the biggest increases in spending during the Labour years, notably the NHS, where on economic grounds it must be doubtful that the marginal value of each £ spent was highest, while concentrating cuts in departments which fared comparatively less well under Labour. It also (albeit to a slightly lesser degree than Labour planned) heavily loads the cuts onto investment spending while doing little more than freeze current spending in real terms, which is not necessarily the balance you would go for if you were trying to lay the foundations for future economic growth.

    Of course I’m aware of the reasons why these were considered the more politically palatable choices, but they have significant consequences for how the composition of public spending will evolve over the next few years; one is that the NHS will absorb a sharply higher proportion of the total, while the relative shares of (say) transport and defence will fall. This reinforces rather than mitigates the long-term trend caused by demographics etc. (To give an idea of the scale of the change, health spending accounted for about 15% of all public service outlays in the mid-1980s and will reach 30% by 2015.)

    Similarly, the triple lock on state pensions combined with protection of universal pensioner entitlements (winter fuel payment, free bus travel, free prescriptions, free TV licences) reinforces the extent to which what the Treasury calls ‘Annually Managed Expenditure’ (pensions, welfare and other transfer payments) is set to gobble up an ever larger portion of total public spending. The rise in the state pension age will eventually help to limit the pension bill, but will probably have to rise to 70 more quickly than under current plans.

    The Keynesian economist Roger Bootle notes some of these trends with despair here: http://www.telegraph.co.uk/finance/comment/rogerbootle/9179286/Governments-choice-of-what-to-cut-makes-you-wince.html. As he concludes: “What I find truly amazing is that about 30% of all government spending goes on social security – up from about 15% just after the war. Is this the result of a conscious preference by the electorate? Or even a carefully considered expert investigation that concluded that such spending offered good value for money. You must be joking. It has just grown like topsy on a tide of good intentions. But as welfare spending has grown, so has the number of people who supposedly rely on it. This excrescence of money for nothing has been behind many of our social and economic ills. Yet even if the Chancellor pushes through £10bn of cuts, which is currently the subject of intense wrangling, the planned stringency in this area will be minimal. The Chinese think there is no clearer sign of our decadence. They are right.”

  • Alex Sabine 24th Apr '12 - 8:15pm

    3. Returning to Mark’s proposal to curb the value of ISAs, I suspect he’s right that – like most tax reliefs – they tend to benefit the relatively affluent disproportionately (though certainly not only or mainly ‘the rich’). They also reward the thrifty (whether rich or poor), which – given the long-term trend of high consumption and low personal savings in the UK – might be considered a reasonable policy goal. It’s an example of my earlier point that progressivity is not the only desirable objective of a sensible and fair tax system, and sometimes other desirable objectives may trump it. One advantage of ISAs over other tax breaks is their transparency and the fact that (as CC points out) they are a simple alternative for those who are befuddled by, or suspicious of, other savings products marketed by the pensions industry.

    4. Of course, as Rankersbo points out, ISA limits merely define the extent to which saving is incentivised, rather than capping the amount people can save. But clearly saving would become less attractive at the margin, and, other things being equal, we would expect less of it as a result (at least through ISAs). People don’t just make discrete decisions on whether to save on the basis of whether it is worthwhile; they decide whether and how much save on the basis of how worthwhile it is. (In a similar vein, the IFS rightly dismissed the Lib Dem claim at the last election that the party’s planned removal of higher-rate pension relief would not reduce overall levels of contributions as “patently nonsense”. Basic-rate relief is valuable, but less valuable than higher-rate relief.) Under Mark’s proposal, once people reached their total tax-free savings limit of £15,000 – which, as others have pointed out, wouldn’t pay for the deposit on a typical house or buying a family car – saving would become significantly less worthwhile, whereas now there is an incentive to steadily build a larger pool of savings.

    5. Mark acknowledges this reality, and attempts to make a virtue of it by arguing that at this juncture the UK economy needs consumers (particularly more affluent people with low debt to income ratios) to spend rather than save in order to rev up the recovery. However, this mixes up macro (demand management) and micro (structural tax reform) policy in an unhelpful way. Presumably it would mean that if and when UK consumers rediscover their more typical propensity to borrow and spend rather than save and invest, the ISA limits should be tweaked again? And why not extend the same principle to pension contributions? (This approach was fashionable in the 1950s and 1960s, when Conservative and Labour governments alike used indirect tax ‘regulators’ and hire-purchase controls in an attempt to stimulate or curb consumption and improve the balance of payments; but it was more successful in undermining industrial confidence and investment than in steering the economy onto firmer ground.)

    The objective of the tax system should be to raise revenue in an equitable way at the lowest possible economic cost, not to fine-tune the composition of GDP. And the purpose of any savings incentives should be to provide a stable and consistent basis on which people can put money aside and plan their futures; if you mess with them too much people will simply lose confidence in them.

    I will concede a subtler point: that it is important to consider questions of timing when implementing long-term reforms, to avoid unhelpful interactions between macroeconomic management and supply-side reforms. For example, the switch from income to consumption taxes in the 1980s may have made sense on microeconomic grounds, but raising VAT from 8% to 15% in 1979, when inflation was high and pay claims were mounting, was incautious and probably meant the subsequent taming of inflation came at a higher cost than necessary in terms of unemployment. (Against that, the perceptive former Labour trade minister turned dissector of UK Chancellors Edmund Dell scores a couple of blows with his observation that ‘on this argument, it would have been impossible ever, in the inflationary UK, to rebalance taxation between direct and indirect taxation. It is one of the costs of high inflation that there is no way forward which does not have damaging side-effects. If the balance between direct and indirect taxation was to be changed, and there were strong arguments for changing it, Howe’s first budget was the best time to do it.)

    But in any case, in the current context policy can hardly be described as incentivising saving rather than spending! With official interest rates at 0.5%, additional monetary stimulus in the form of QE, negative real rates of return on saving and above-target inflation, consumers have strong incentives to spend now and postpone debt repayment. The fact that they are not doing so despite all those inducements suggests that capping tax relief on ISAs would be of no practical use as a tool of economic management.

    6. Defensible as ISAs might be, they illustrate a wider dilemma. It is in the nature of incentivising particular behaviour (in this case saving) through the tax system that much of it would have happened anyway without the tax breaks, so that a big chunk of the tax relief provided simply represents an implicit subsidy (via remittance of tax) to the person making use of it. Moreover, tax reliefs are of more value to those who have a fair amount of discretion over the ways in which they receive and allocate their income (eg the self-employed, businesses, the high-paid).

    However, this is not because policy-makers have set out to privilege the well-off, nor is it because the well-off have somehow improperly ‘milked’ the system; it is simply a downside of seeking to use the tax system to reward certain types of behaviour rather than taking a neutral, uniform approach. In this sense, all tax breaks are special privileges, and what is a privilege to one group of people is a penalty to everyone else who isn’t eligible for, or doesn’t take advantage of, the relief, since the long list of privileges requires higher tax rates than would otherwise be the case.

    Given that the effect of the intended incentives is often smaller than hoped, while the proliferation of tax breaks has spawned unintended loopholes and unwelcome distortions to rational decision-making, there is a strong case for sweeping most of them away and lowering rates accordingly. The problem, of course, is that a tax break conveys a highly visible (and superficially costless) privilege to one group of people, while the real costs are masked by the fact that they are dispersed across the taxpaying population; lobby groups spring up to defend every relief and exemption, and any attempt to curtail or remove these privileges is met with a predictable hue and cry. This can only be overcome (if at all) by a far-reaching and intellectually coherent package of reforms which is less easily ‘picked apart’, and a lot of political will.

    Total neutrality is probably impossible to achieve, and in a few cases (externalities) it may not even be desirable; but I think we should set a high hurdle for departures from it. Whether ISAs cross that hurdle is debatable, and needs to fit in to a wider consideration of how the tax system treats savings and investment. (Although the connection is not always apparent to the saver, the return to saving is governed by the return to the investment that the saving finances.) But Mark’s proposal – and the furore over the caps on tax reliefs and action on other anomalies in the budget – should spark a wider reappraisal of how to make our tax system fit for purpose.

  • Richard Dean 24th Apr '12 - 8:49pm

    Is brevity a virtue, Alex?

    Short words,
    short clauses,
    short uncomplicated sentences,
    short paragraphs, and a
    short distance between introducton and finale.

    So I tell my students anyway! 🙂

  • Alex Sabine 24th Apr '12 - 8:59pm

    Fair point!

    And on the substance…?

  • I am surprised that so many people are rushing to defend the hugely regressive ISA tax break. From memory IFS figures show that 50% of households have less than £1000 in savings. Relatively poor people just don’t have enough savings for the tax break to be worth anything.

    Assuming 3% interest, and assuming you are a basic rate taxpayer, then each £1000 of ISA savings saves you £7.50 in tax per year. You have to be pretty well-off for £7.50/£1000 to make any meaningful difference to you.

    An alternative would be stop ISAs being tax free, and make them 20% off – that is, tax free if you pay basic rate tax, and higher rate tax payers like me would pay 20% instead of 40%. That would presumably save around £0.5bn. Not as good as Mark’s plan, but better than nothing if his is politically untenable.

  • A minor point – but one which just highlights the hidden complexity of what Mark is suggesting – what about Share ISA’s? On what basis are you calculating the ‘value’ when this can oscillate around entirely due to the vagaries of the stock market? A specific date – would encourage people to liquidate a week before if they are just below the limit. An average value over the year – how complex to display that on your tax return – better to not invest and have to worry about it,

  • Tim

    With respect, you don’t seem to have taken in the point that’s been made (repeatedly) about people who use ISAs as an alternative to a pension scheme.

    Obviously those people will want to build up more than £15,000 over their working lives, even if their income is average or below average. After all, £15,000, spread over someone’s working life, is only something like £8 a week – that’s the price of 4 or 5 cups of coffee these days.

  • Richard Dean 24th Apr '12 - 10:13pm

    Alex,
    ===========
    Ok, I’ll start by summarizing what I believe are your points, which are ….
    ===========
    We do need a more strategic, coherent view of tax re-organization, and similarly for public spending – something different to the historical LibDem approach. On one level, ISA’s benefit the thrifty, which we should encourage this. ISAs are also transparent and convenient for people who do not want to get bogged down in details. But they also benefot the better off – is this consistent with our social policy?In effect, the ISA tax breaks re-distribute wealth from poor to middle-income people – because the poorer people have to pay extra taxes to make up the shortfall.

    Keynesian thinking can also be relevant to the debate. As Rankersbo points out, limits on ISAs define the extent to which saving is incentivised. Under Mark’s proposal, once people reached their total tax-free savings limit of £15,000, saving would become significantly less worthwhile, whereas now there is an incentive to save more. Mark argues that the UK economy needs consumers to spend more so as to rev up the recovery. This combines both macro (demand management) and micro (structural tax reform) policy, but in my view it does it in an unhelpful way.
    =========
    Now that I see what you are saying, I can make some comments …
    =========
    My brother is poor, with a chequered NI history, but he now works hard and has managed to save over the years and likes the idea that the government won’t take tax off – he will need all the cash he can get in. He is one of the poor who has benefitted, and as far as he can see it’s the sub-set of the well-off that are paying for his tax break. (I am poorer, witha worse history, and an income so low that I don’t pay any tax. so I’m not paying for his tax berak!)

    Perhaps it is traditional to separate concepts of demand management from concepts of structral tax reform, but bringing them together looks to me like a nice approach to explore! My brain is chaotic at the best of times, and I’m happy manipulating confusing and even contradictory concepts – sometimes the result is something worth taking forward.

  • Lennon – you would be able to pay £15k in. That is straightforward to operate. (If you take £1000 out you can add £1000 later, even if your investment has doubled in value).

  • Richard, I’m sorry if I put my arguments in a confusing way. I tried to express them clearly, even if I failed to do so concisely. Unfortunately, political economy is rarely simple and apparently simple solutions often have unintended effects. Even when there are simple solutions, they are not easy.

    However I continue to believe simplifying the tax system would be a valuable service to ordinary people, would reduce the advantages enjoyed by the well-off in an equitable way, and would allow people to take their own decisions unbidden.

    For me, aiming for a more neutral tax system is not only a technocratic objective but also a liberal one. It assumes that individuals are the best judges of how to spend, invest or save their own money.

    That is my starting point. In reality we are not starting from a blank sheet of paper, so we shouldn’t let the best be the enemy of the good. However, we need an idea of where we want to get to in order to work out how to get there.

    On the specifics of ISAs, I am open-minded. But I take on board Mark and Tim’s criticisms of them. I simply point out that these criticisms have wider application within our tax system, and that other targets might be riper for immediate reform.

    In any case, reform should be informed by an intellectually coherent approach to taxation and tax reliefs. How progressive the system is should be one test, but by no means the single lodestar. And some ways of achieving a progressive outcome are better than others; in my view, a broad tax base and lower rates is a better recipe than a narrow, preference-ridden tax base with high rates.

    On your specific example, even people who are too poor to pay income tax usually pay VAT, excise duties and often National Insurance and council tax. So they too ‘pay’ for the tax breaks enjoyed by others. That doesn’t in itself mean the tax breaks are unjustified, but it should at least be a sobering consideration for those who claim to want a progressive system.

    And I wasn’t objecting to the idea that desirable long-term reforms could be dovetailed with short-term economic management priorities. My point was that in this case the two are in conflict, if you regard encouraging saving as a worthwhile long-term objective and yet believe that the economy currently needs a dose of consumer spending. If so, then playing around with savings incentives probably isn’t the best way to inject and later withdraw demand. (At the simplest level the government can just do this directly through its budgetary stance if it really felt it would help, but more appropriately the Bank of England can achieve the same effect through monetary policy.)

  • Richard Dean 25th Apr '12 - 12:38am

    Alex, you are quite right, I had forgotten about the VAT … oh well, death and taxes !

    I don’t see a conflict between short and long term objectives. Watch the sea. Little short waves travel over bigger longer ones and they don’t affect each other much.

  • An ISA total limit as suggested will lose a load of pensioner votes! The effect of quantitative easing on pension annuity rates has been dire and the current rate of interest on most cash ISA accounts is well below the inflation rate.

  • Barry Fleet 25th Apr '12 - 3:12pm

    It has become clear that ISAs , both the cash & investment versions, are increasingly used as an alternative to pension plans because of ease of accessibility and because of distrust of pensions, usually driven by uninformed press comment.

    Mark concedes that there is a problem of low long term pension provision, but the assumption that this will be solved by auto enrolment is unfotunately naive, not least because people will be able to opt out. It should ideally be made compulsory as in Australia, to have a real chance of addressing the problem.

    There also seems to be an idea that people are selfishly saving their money rather than spending it on consumer items for the good of the economy. I’m not sure if this naive or illiberal or both !

  • The big issue of principle here, which almost no-one seems to want to confront, is whether or not retrospective changes to the system of tax allowances are in themselves ethical. We can argue till we’re blue in the face about whether going forward ISAs should exist or whether they should be set at a particular level. That’s fine, because people can adjust their behaviour and alter their decisions to take account of any changes that affect the future only. But the SMF proposal is unambiguously to start applying taxes now to what on HMRC figures are more than two-thirds of current ISA holdings which millions of people have accumulated over the past 15 years in good faith on the explicit promise from the state that they would be free of tax. That’s why people put money into them. And for the politicians now to renege on that undertaking and decide to apply tax to those savings after all raises fundamental questions about trust between the state and the citizen. Indeed, what kind of so-called “liberal” unthinkingly endorses retrospective punitive measures against previous actions that were at the time, and still broadly are, considered desirable in themselves?

    I’m minded to point out that there are also two obvious practical problems if such a breach of faith were to be supported. One is that it further shreds any credibility that politicians might still retain when they tell the public to set aside money for a rainy day. You simply can’t preach to people about the need to save and expect to be taken seriously if you’ve just blatantly pillaged the savings pots that a generation of politicians have purposely encouraged people to accumulate. The other problem is the retirement deficit in this country. It’s widely agreed that we need to find ways of setting aside more cash for our post-work lives. The SMF proposal is deeply retrograde in this respect, for it only worsens the problem, making it even less likely that people will feel confident in saving for retirement if it becomes clear that, as well as politicians thieving from their pension pots, as is now eidely believed, the supposedly tax-free ISA is also going to be gouged retrospectively by a government looking for some handy spending money.

  • You ignore the fact that there are cash ISAs (just a savings account) and stock and shares ISA – which are investments on the stockmarket, and the £11,280 limit only applies to the latter (you can only save half of that amount in a cash ISA). Paying down mortgages is definitely not a superior way of investing your money if you have identified stocks are are likely to rise in value. There is an impact on the stockmarket too of cutting off an avenue of investment in stocks, which are likely to become the preserve of the few. How far the Lib Dems have wandered from the Liberal values of J S Mill – in fact, you could say, you are the opposite of the 19th century Liberals!

  • Stephen Psallidas 7th Oct '14 - 10:37pm

    Setting a *total lifetime limit* of £15,000 in an ISA (and – according to Mark – making it retrospective too??!) seems not only illiberal, but also impractical and profoundly counter-productive.

    1. The annual limit of £15K is a lot for low-earners, but also not that much for high-earners. In other words, it’s targeted at middle-income earners. So what? Many middle income earners see it as a good way to save their *post income tax/NI* salary for the long term. ISAs are simple to administer, predictable and easy to understand for anyone – no Government messing or ludicrously complex tax calculations, or commissions from greedy banks.
    2. Setting a £15K total limit would make ISAs virtually worthless for long term saving, for the bulk of middle income households. If a middle-income household is able to put say £5K per year into an ISA, what would happen after 3 years?
    3. What would happen when the investments in an ISA grew to £16,000 – would ISA-holders be forced to withdraw the £1,000 ‘surplus’? What would happen to people who currently have substantially more than £15,000 in an ISA wrapper – would they be forced to sell the bulk of their investments? Once they had withdrawn the ‘surplus’ surely they will simply do their best to re-invest in other tax-free opportunities such as EITs, offshore investments etc, which will still minimise taxes payable?
    4. As pointed out above, people have been told that the money they put into an ISA is tax-free forever – if that contract is, after 25 years, to be retrospectively broken for millions of households, there needs to be a very good (rational, logical, fair) reason set out, apart from just raising more money – or the party that does it will pay an electoral price.
    5. Both Labour and the Coalition have increased the ISA annual contribution limit far more than the rate of inflation in recent years – surely suddenly abandoning this now would send a very confusing message?

    If the ISAs of the middle income segment (not the tax-evading offshore accounts of the wealthy, or tax-evading shady practices of mega-corps) are judged to be the most effective target for the Govt, then why not instead reduce the annual contribution limit? Drop it to say £10K per year. Or freeze it at £15K for the foreseeable future. Or include ISA contributions into a lifetime pensions/ISA contribution limit. All of these are simple to administer – easy to understand and accept – and don’t emasculate one of the most effective ways for people to save for their futures.

    Just my view.

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