Could complexity create problems for popular ISA wrappers?

In a relatively short space of time the number of ISA wrappers available to investors has increased and therefore the level of complexity associated with each product has increased too. You only need to go back one year to find only two long-standing versions in the shape of the Cash ISA and Stocks and Shares ISA.

Yet, in December 2015, the Help to Buy ISA was added, followed in April 2016 by the Innovative Finance ISA and now from next April, the Lifetime ISA is expected to be introduced after much debate. However not all the wrappers are available to everyone, restrictions do apply and impact on what’s possible under another wrapper. Furthermore, as one might expect, no two ISAs are the same and the differences can be substantial, particularly with regards to content, purpose, duration, accessibility and incentives. To illustrate this point, I’ve even forgotten to mention the Junior ISA! 

ISAs have been a remarkably successful product wrapper, even if the value of the incentives are questionable. However, give investors too much choice and you run the risk of turning them off.  Many cannot afford to take advice and in any case with the sums involved it just isn’t economic.  As a result, there remains a worry that ISAs will lose their appeal. The expansion of the ISA regime also coincides with the introduction of the Personal Savings Allowance and the Dividend Allowance. One also expects the new Chancellor to revisit the pension reforms that were shelved before the European Referendum.

When the Lifetime ISA was announced many felt that it indicated the direction of travel for any new pensions regime and with its introduction now going through the process of becoming legislation, you have a sense that pension reform is likely to be back on the agenda again. To speculate, one possible output may be to have a two-tier pension regime, the existing one with flat rate tax relief on contributions restricted to say £10,000 per annum and the Lifetime ISA; over a generational shift the Lifetime ISA could emerge as the ultimate retirement savings vehicle.

We have a history of replacing wrappers, doing nothing about it for a time and then working out how to migrate legacy wrappers into new regime wrappers. Many will remember Tax Exempted Special Savings Accounts (TESSA), Personal Equity Plans (PEP) and more recently Child Trust Funds (CTF), over time these have found a way into the ISA space and even now the Help-to-buy ISA looks like it will be consumed within the Lifetime ISA.

All this leads to more change, confusion in the minds of investors and an undoubted headache for product providers, who are the ones who need to administer change. Some providers have indicated that they won’t offer the Lifetime ISA and whilst I fully understand their current position, I expect attitudes to soften if, as I expect, the wrapper starts life as a supplementary retirement savings vehicle and then morphs over time, into something much simpler and easier to grasp.

There is no escaping the change and the speed at which it all now happens; not everyone can marshal their efforts and more may take the view that administration processing is non-core and therefore seek to outsource whilst retaining the customer engagement.