Can the government make ISA simpler please?

(And why they haven’t…)

When I began my career in UK investment management, my first task was to explore how structured products could fit inside tax-free savings wrappers. Back then, there were two main options: TESSA (Tax-Exempt Special Savings Account) and PEP (Personal Equity Plan)—the latter born from Thatcher and Lawson’s drive to encourage share ownership in newly privatised national companies.

In April 1999, these two wrappers merged into the Individual Savings Account (ISA). I thought this would simplify things. I was wrong.

Over the years, ISA rules have changed repeatedly. Some restrictions were introduced, then reversed. And the new variations and rules were added.

Originally, ISAs were meant to hold cash, stocks and shares (including funds, investment trusts, and qualifying securities). But successive governments kept adding new types of ISAs, each with its own limits and rules.

Today, alongside cash ISAs and stocks & shares ISAs, we have:

• Junior ISAs (to encourage saving for children until they turn 18)

• Innovative Finance ISAs (for products like peer-to-peer or P2P lending)

• Help to Buy ISAs (a cash ISA alternative for first-time buyers, later replaced by the Lifetime ISA or LISA)

Governments have promised to simplify ISAs, but with little success. Why do we have so many types of ISAs? Do we really need them all? Most people would say no. There are two main reasons for this.

1. Governments use ISAs to shape savings behaviour

Perhaps every Chancellor wanted a legacy like Lawson’s with PEPs. Successive UK governments have tried to use ISAs to influence how people save, hoping for certain economic outcomes.

For example, when the current government sought to boost British economic growth, it considered introducing a British ISA (now scrapped). Instead, it proposed capping the cash ISA allowance at £12,000 for those under 65 from April 2027. The idea is to encourage people to invest more in stocks and shares, rather than simply parking money in cash ISAs. But it also introduced complications in having different ISA allowances for different types of assets.

2. Managing “Side Effects”, which complicates the rules

Even when a government has good reasons to change ISA rules, it must deal with any “side effects”. These include the impact on tax receipts and the types of assets that retail investors can buy via ISAs. For instance, in trying to encourage P2P lending but concerned about retail investors piling on such high-risk investments, we ended up yet another ISA – the Innovative Finance ISAs with different rules and separate authorisation for existing ISA managers. And only debt-based securities could be included.

So, we end up with complex tax-free savings products with complex rules. This leads to confusion. For example, should money market funds—which are very cash-like—be excluded from stocks & shares ISAs? Building societies say “no” (they don’t want investors to move from cash ISAs with lower allowances to stocks & shares ISAs). Platforms say “yes”, arguing that money market funds aren’t deposits and can help investors build their portfolios in stocks & shares ISAs.

Another more confusing example: exchange-traded notes (ETNs) on crypto-assets were allowed to be held in stocks & shares ISAs from October last year. But that will only last until April this year. After that, these ETNs must be transferred to an IF ISA. And as mentioned above, many existing stocks & shares ISA managers do not have the permissions to operate an IF ISA.

A better way forward

Instead of tinkering at the edges, the government should simply make ISAs easier to understand and use.

Set a single annual allowance that covers all eligible investments. Don’t try to micromanage savers’ behaviour—focus on nudges that encourage people to save. Help savers learn the basics: the importance of an investment time horizon, regular savings, diversification, and understanding the difference between volatility and risk.

If the public develops a strong savings culture, it could help address many of the UK’s economic challenges, such as slow growth, a lack of investment, and others.

James Chu CFA, Head of Investment Solutions