Nov
2016
‘KISS’ – Humbug Joins Telegraph’s Campaign to Keep ISAs Simple
DIY Investor
23 November 2016
In the pre-amble to his popular ‘Diary of a DIY Investor’ column, our very own DIY investor, Humbug, recalls some advice he received as a young man that has stayed with him ever since: ‘When I first started in radio a huge man with an ugly face and the unlikely surname of Belcher taught me how to kiss. His advice was ‘Keep it Simple Son’ or KISS for short.
‘After all why make something complicated unless you have to? KISS also works in trading and investing – a favourable report or positive trading update usually does wonders for the share price and is one of the things I look for each morning on the news feed.’
When they were introduced in 1999, the Individual Savings Account – ISA – couldn’t have been more simple – a straightforward, tax-free savings vehicle; today it is Britain’s most popular savings account with 22 million account holders ranging from children to pensioners.
For many it will be their most valuable asset after their house and their pension, but now the ISA family of products is now very broad, with a whole range of very different accounts – with many rules, limits and terms applying.
In the countdown to today’s Autumn Statement the Daily Telegraph launched a campaign to return simplicity to the world of ISAs, going so far as to suggest that the complex nature of the current crop of products could either cause people to subscribe to a product that is, in the currently fashionable vernacular, sub-optimal in terms of their individual circumstances, or in extreme cases lead to claims of miss-selling.
An ISA is an intrinsically simple concept – taxed earnings are put into either a cash account, or one that invests in stocks and shares, and any investment returns and interest are free of income and capital gains tax.
For what were almost certainly well-intentioned reasons both the coalition government and its Tory successor set about increasing annual subscription levels, increasing the range of assets that could be sheltered, and trying to tailor ISA products to address the very real financial challenges of purchasing a property and saving for retirement.
The Telegraph is particularly exercised by the latest iteration – the Lifetime ISA, or ‘LISA’ – which can be used variously to address each of these objectives, but becoming just too opaque as a result.
‘the complexity of the ISA regime could put savers off for good’
Consequently, Britain’s biggest building society, Nationwide, has declined to offer the LISA for fear of confusing savers; there has been quite a backlash from some heavy-hitters including Baroness Altmann who fears that the LISA will encourage the wrong behaviour in those saving for retirement and others who fear that the complexity of the ISA regime could put savers off for good.
Britain’s largest Stocks and Shares ISA provider, Hargreaves Lansdown, has called on the government to create a ‘Super ISA’ – an umbrella account in which to lodge various different ISAs, each of which will have different rules and limits.
When first introduced, there were two choices – Cash or Stocks and Shares ISAs, which remain the most straightforward; the Junior ISA was later added for those under 18.
The Help to Buy ISA is designed to help first-time buyers, the Innovative Finance ISA (IFISA) can include P2P loans, and when it is introduced next April, the LISA will be the sixth different account type.
The IFISA is one example of where good intentions have been let down by poor execution; the IFISA is designed to shelter P2P loans and potentially crowdfunding investments, but when it launched in April this year, virtually none of the would-be providers had the necessary permissions to come to market:
‘Regulation Stymies Innovative Finance ISA Providers’ – DIY Investor 4th April 2016.
The Help to Buy ISA can be used by both members of a couple the government tops up your contribution by 25% when a first property is bought, to a maximum of £3,000; this has proven extremely popular with over 500,000 people opening accounts, but because guidelines have been unclear many have missed out on purchases or had to find alternative sources of ‘bridging’ finance:
‘The not Much use to Buyers ISA’ – DIY Investor 21st August
There are two key issues:
Firstly, the government marketed these accounts as a way to save towards the deposit on a property, but tucked away in the small print – some have even suggested slipped in as an afterthought – is the fact that the bonus is only paid on completion, not at exchange of contracts when the typically 10% deposit needs to be handed over. This has had some couples back at BOMAD, or potentially losing a purchase that will already have cost them in fees and searches.
The other concerns the limits on the value of properties; the bonus is only payable if the total property price is under £250,000 (or £450,000 in London) which has caused problems for people buying through shared ownership schemes because the Help to Buy ISA applies to the total value of the property not the share – typically 50% – that is purchased under the scheme.
‘If the Telegraph is irascible about the Help to Buy ISA it pulls no punches in highlighting the dangers it foresees with the LISA’
If the Telegraph is irascible about the Help to Buy ISA it pulls no punches in highlighting the dangers it foresees with the LISA when it launches in April 2017.
Those under the age of 40 will be able to open LISA accounts and pay in up to £4,000 a year; these subscriptions attract a 25% bonus each year until the age of 50.
The fund can then either be used for a first property purchase or can remain in the account until the holder reaches 60 when it can be used as a retirement fund.
However, withdrawals for any other purpose, at any other time, not only mean that the holder will forego any bonus they had been expecting, they are also walloped with a 5% penalty charge.
Again, this was probably born of a perfectly honourable attempt to stop people dipping in willy-nilly and frittering away their pot, but on the grounds that exit penalties on pensions have recently been capped at just 1% by City watchdog, the FCA, 5% looks like a sledgehammer to crack a nut; the anger it has provoked is perhaps understandable.
It is also feared that younger savers may opt out of company pension schemes to boost their saving for a deposit, but leave themselves missing out on employer contributions and without adequate provision down the line.
Overall, the ambition to get people saving and investing that spawned the Individual Savings Account is entirely harmonious with DIY Investor’s founding principles and should be applauded; however, Humbug is right to endorse the Telegraph’s campaign because the worst outcome would be that would-be savers are turned off by the complexity of products that are being constructed, albeit clumsily, to try to help them.
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