The first budget for new chancellor Rachel Reeves will arrive at the end of October. The rumor mill has already run wild with speculation about what might be included, but we’ve outlined three key areas the Government could focus on when it comes to people’s investments and savings.
ISA simplification
At a time when the government faces significant tax constraints and little in the way of ‘good news’, the simplification of the ISA offers an opportunity to announce consumer-focused reform that will benefit investors and the wider economy.
As a first step, the government should combine cash and stocks and shares ISAs, the two most popular versions of ISAs in the UK, reducing the complexity of upfront choices and creating a more flexible system where consumers can easily move between the cash savings and investments.
HMRC figures suggest there are around three million people in the UK with £20,000 or more invested in cash ISAs and no money invested in stocks and shares ISAs. If only half of that money was invested over the long term, an additional £30bn of investment would be unlocked.
With around half of ISA assets on AJ Bell’s platform investing in UK companies or UK-focused funds, domestic companies should benefit disproportionately as a result, with the potential for additional retail investment to deepen liquidity and support higher valuations registrations of British companies.
Taxation of pensions
The government has not been shy about the need to close what it says is a surprise £22bn black hole in public finances. But before jumping to a solution, you should think carefully about the implications. This is especially the case when it comes to pensions, where the temptation to gamble should be resisted.
Although in opposition Labor indicated that it would reverse the abolition of the lifetime allowance, it appears to have accepted that this is neither practical nor sensible.
Pension savers will hope that Ms. Reeves takes a similar approach to other elements of the pension tax system and resists using pension tax relief to increase the government’s spending power. Such a change cannot be introduced easily or simply. Rather than simplifying pension tax relief, it would introduce a huge layer of new complexity for all pension savers, employers and HMRC.
The prospect of a pension tax raid would be extremely damaging to the government and send the wrong message to savers.
We would appreciate the government’s commitment not to fundamentally alter the pension tax rules. We need to create a stable environment where pension savers can trust that the system they are saving into is stable and predictable.
ISA for life
Simplifying the ISA should be a priority for this government and steps could also be taken to improve the appeal of the existing lifetime ISA.
Helping people onto the housing ladder is a clear priority for the new government and the chancellor should fix problems in the design of the Lifetime ISA to make it as attractive as possible to potential home buyers.
Obviously, the 25% early withdrawal charge, which effectively acts as a 6.25% exit penalty, is deeply unfair and punishes those for whom a change in circumstances means they cannot pursue their home ownership aspirations . Reducing this to 20%, so it simply aims to return the government’s initial bonus, would be a simple and low-cost reform that benefits younger people.
The government should also consider raising the minimum property purchase price, which currently stands at £450,000, to reflect house price inflation since LISA was introduced seven years ago.
Disclaimer: These articles are for informational purposes only and are not a personal recommendation or advice. Tax, pension, ISA and LISA rules apply and could change in the future.
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