25 Years of ISAs: A Quarter of a Century of Tax-Efficient Savings and Investing

As we approach the end of the 23/24 Tax-Year we also approach a significant landmark birthday of 25-years, for one of Financial Planning’s key planning mechanisms: The Individual Savings Account, or ISA as it is commonly known. With imminent changes and updates coming to one of the most used savings and investing accounts in the UK, I wanted to take a step back to explore its origins and various iterations before looking ahead to the future of the ISA.??

The Inception of ISAs?

So where does the ISA come from? Well, in 1999, British Labour politician Gordon Brown?introduced?Individual Savings Accounts (ISAs) to replace the previous?Personal Equity Plans (PEPs)?and?Tax-Exempt Special Savings Accounts (TESSAs). However, their inception was met with mixed reactions.?

When Gordon Brown announced ISAs in his first Budget, the proposals faced significant criticism. Investors, commentators, investment companies, and financial advisers were sceptical. The bone of contention was that ISA investment limits seemed less favourable compared to the limits that applied to PEPs (for investment) and TESSAs (for cash). The more modest ISA limit of up to ￡7,000 (with ￡3,000 as the cash element) was seen as an “attack” on the savings industry.??

Since then, the ISA has gone through various rounds of tweaks and changes to arrive at the current ISA proposition we see today, and it has become a stalwart of the Financial Planning process and undoubtably helped millions of Brits to save and invest.??

Below is a summary of some of the key milestones through the first 25-years of ISAs.??

?

The Journey of ISAs?

1. 1999: ISAs were born, replacing PEPs and TESSAs. The annual allowance was set at ￡7,000 per tax year.?

1. 2008/09: The first change to the existing limit occurred, increasing the allowance by ￡600 per year.?

1. 2013: The government allowed ISAs to hold shares listed on the?Alternative Investment Market (AIM). This move opened up investment opportunities in smaller, growth-oriented companies. Additionally, ISAs became eligible for?Business Relief (BR), which provides inheritance tax (IHT) planning benefits. Investors could now include AIM-listed shares within their ISAs, potentially shielding them from IHT.??

1. 2014: The government introduced the concept of?New ISAs (NISAs), which combined both cash and stocks & shares ISAs. The annual allowance for NISAs was set at?￡15,000. This marked a simplification of the ISA landscape, making it easier for savers to manage their investments.?

1. 2017: The NISA allowance underwent another transformation, expanding to?￡20,000?per tax year. Savers could now contribute up to this higher limit across cash, stocks & shares, and innovative finance ISAs. The flexibility offered by the increased allowance encouraged more people to participate in ISAs.?

As of the end of the 21/22 tax-year, ￡741.6 billion was held in ISA accounts with 62% of that held in Stocks & Shares. Proving ISAs have been a very successful tool for individual savers and investors to grow and preserve their wealth tax-efficiently. But what is in store for ISAs moving forward???

?

The Future of ISAs?

As we look ahead, what might the future hold for ISAs? Here are some considerations:?

1. Digital Transformation: ISAs have become more accessible and user-friendly through digital platforms. Examples such as Nutmeg and Moneybox have engaged savers and investors on their platform to use ISAs and their main account type, with options varying based on the individuals' objectives; saving for a house for example lends to a LISA.??

1. Expanded Investment Options: Broader investment choices within ISAs are also on the rise, including sustainable and ethical funds, as managers seek to engage with new customers through thematic investing opportunities.??

1. Innovative Products: New ISA variants have already emerged with the LISA and JISA two specific products that focus on a particular audience but what other audiences can the ISA be used for???

1. Tax Efficiency: Focus on tax efficiency as a key driver for ISA usage will remain at the core of the proposition though the allowances and tax-exemptions may chop, and charge as new Chancellors and Governments look to have their say on the UK saving and investing environment.??

However, there are two specific changes already in motion and coming to ISAs on the 6th April to be aware of which I have outlined below:??

1. Multiple ISA Subscriptions?

Currently, you can only subscribe to (pay into) one ISA of each type per tax year. However, starting from April 2024, you will be able to pay into?multiple ISAs of the same type?within the same tax year.?

This change simplifies things for both cash savers and investors. Cash savers can open multiple new cash ISAs as better interest rate deals become available. Investors can more easily try out different stocks & shares ISA providers making the environment even more competitive and I am sure incentives for customers to hold with one provider will be common.??

1. Partial ISA Transfers:?

Currently, you can only do partial transfers of funds that you’ve paid into?before the current tax year. If you want to move money you’ve paid in since 6th April that year, you need to do so in full. This is changing and from April 2024, you’ll have greater flexibility.??

For example, if you have ￡15,000 in a cash ISA and want to move just ￡10,000 of it to a new provider, you’ll be able to do so, regardless of when that ￡15,000 was paid in.?

So, even more flexibility is coming to the ISA landscape and that can only be a good thing. Flexibility drives comfort with decisions if the individual knows it can be reversed or moved much more easily. This then boosts the incentive for people to save and invest.??

In summary, the ISA has proved to be a hugely successful product that has enabled millions of Britons to build their wealth in a tax-efficient manner. ISAs look set to remain a stalwart of the Financial Planning process due to their flexibility and with Pensions ruled recently enhancing the argument for leaving them alone until necessary, the ISA can be a fantastic way of clients entering drawdown phase in another way.??