Savers will be free to open as many ISAs as they like without losing their tax-free allowance, under plans being considered by the chancellor.
According to the Telegraph, Jeremy Hunt will use his Autumn Statement to announce an ISA shake-up, which should encourage cash ISA providers to offer more competitive rates, and allow savers to make hundreds of extra pounds in tax-free interest.
Savers could also be handed an extra £5,000 ISA allowance if they put money into a “Great British ISA”, in a bid to boost the economy.
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However, it is not clear if there will be any changes to the lifetime ISA regime. Campaigners had been calling for the exit penalty to be scrapped, and for the £450,000 property limit to be increased.
Sarah Coles, head of personal finance at the wealth manager Hargreaves Lansdown, says the Autumn Statement - which will be announced this Wednesday - is “a brilliant opportunity to make vital changes to ISAs”, but it is “incredibly disappointing if Hunt has decided not to revisit the lifetime ISA penalty”.
We outline which ISA reforms could be unveiled on 22 November.
What ISA reforms can we expect in the Autumn Statement?
Savers are currently restricted to opening and putting money into just one of each type of ISA every tax year. For example, one cash ISA and one stocks and shares ISA.
However, the Treasury is considering allowing customers to open multiple ISAs of the same type, without losing their £20,000 tax-free allowance. This could happen as early as April 2024.
“For cash ISAs, this restriction means that if interest rates change, or the provider reduces their rates mid-year, the saver can lose out for the remaining months,” explains Rob Morgan, chief analyst at the wealth manager Charles Stanley.
“If the chancellor scraps the single ISA limit and allows people to transfer part-way through the year and make further contributions to the new provider, it could help improve the competitive landscape.”
According to Morgan, when interest rates were rock-bottom there wasn’t much to be gained by moving between providers regularly, but with the Bank of England base rate now above 5%, “having easy access to competitive rates can make a significant difference in helping savers meet their financial goals”.
Dean Butler, managing director for retail direct at Standard Life, agrees that the ability to start saving into another cash ISA mid-way through the tax year would be “a major win for savers and could also incentivise providers to improve rates”.
He highlights those who subscribed to a fixed-rate cash ISA earlier this year, who will have watched as interest rates climbed higher and higher. “There are also likely to be some customers who want to mix fixed-rate deals and easy-access savings to give them greater flexibility with their savings and this proposal could help them.”
In terms of stocks and shares ISAs, Butler says the case for taking out more than one within a tax year is less obvious. But if a customer wanted to access an investment that’s not available in their current ISA wrapper, or a specific product feature, “it could be a useful addition”.
While savers are not allowed to open more than one type of ISA and pay into it in a tax year, they can transfer their money to another ISA without losing the tax-free status. However, the new ISA provider must facilitate this transfer, and it can be time-consuming.
What about this "Great British ISA"?
Savers could receive an extra £5,000 ISA allowance as part of the Autumn Statement, according to the Telegraph. But there's a catch - the money will need to be invested in UK-listed companies.
The chancellor is said to be actively considering launching a “Great British ISA” under plans to boost the economy.
Such a move would follow a letter to The Times calling for such reforms, signed by City figures including former pensions minister Baroness Altmann and the bosses of investment groups such as Panmure Gordon and Shore Capital.
The letter said: “A major oddity of the present ISA regime is that it offers the same incentives for savers to invest in overseas as domestic businesses.”
The idea is that savers and investors would keep their £20,000 tax-free allowance, but receive a further £5,000 for investing solely in British businesses.
Could we see changes to the lifetime ISA?
It was reported in the media last week that reforming the lifetime ISA was not part of plans under consideration for the Autumn Statement - either lifting the £450,000 limit (imposed on the value of a property that a first-time buyer can purchase) and/or scrapping the penalty charge for savers who make an unauthorised withdrawal.
However, as the statement edges closer, it is thought the chancellor may be considering tweaking the product to help first-time buyers.
Jim Islam, chief financial officer at lifetime ISA provider OneFamily, says: “We urge the government to increase the property price cap so people are not hit unfairly by the penalty and to commit to reviewing this regularly in line with house prices.”
Coles at Hargreaves Lansdown adds: "Runaway house price rises over the past five years have rendered the £450,000 limit much less generous than it was back in 2018. Londoners especially would find the average home well out of reach within the scheme. It means there’s a real risk that over time more people fall foul of the punitive penalty.”
She says that if people need to withdraw money for any reason other than a first-time property or after the age of 60, the 25% penalty currently not only claws back the government bonus to save, but also applies an additional 6.25% penalty based on the amount invested. "This is a horrible price to pay for trying to do the right thing,” she notes.
An ISA consultation on the cards
Hunt is expected to announce a consultation into wider ISA reforms later this month.
It is not clear what sort of changes could be on the cards, but unless lifetime ISA changes are announced in the Autumn Statement, there will no doubt be intense lobbying for this to happen as part of the consultation.
The investment platform AJ Bell is calling for radical reform, with the introduction of “One ISA”, which combines all the different ISA products into one.
The Treasury told MoneyWeek: “HM Treasury is receptive to ideas of how we can make ISAs more attractive to encourage people to develop a savings habit and to invest in a way that works for them.”
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