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Simplifying and Expanding ISA Allowances: A Mixed Bag

Jeremy Hunt‘s recent proposals to increase the ISA allowance and merge cash and stocks and shares ISAs have sparked a discussion on the potential impact of these changes. While raising the allowance is generally welcomed, there are concerns that other suggestions could overcomplicate a well-established system. Instead, there are more effective changes that should be considered to streamline the ISA regime.

The Benefits of Increasing the ISA Allowance

An increase in the ISA allowance is seen as a positive move for investors, particularly those affected by cuts in dividend tax and capital gains tax allowances. Such an increase would release pent-up demand and encourage more investments in UK stocks and shares. A proposed rise of £10,000 to £30,000 could lead to substantial capital gains savings for higher-rate taxpayers over a 20-year period.

Moreover, an increased allowance would naturally boost investments in the UK, as the majority of investments over the past year have already been in the UK. Most investors tend to hold their investments for the long term. This shift in focus toward UK investment makes the idea of a UK-specific ISA allowance seem redundant and potentially confusing.

Overcomplicating the System: Merging Cash and Stocks and Shares ISAs

One suggestion to merge cash and stocks and shares ISAs may inadvertently complicate matters. This change would need to ensure that cash ISA customers do not receive communications related to investment issues, which could be confusing for those who only wish to keep their money in cash.

Rather than complicating the system further, there are alternative changes that could provide real benefits. For instance, allowing individuals to pay into as many ISAs as they like within the £20,000 ISA limit for each tax year would simplify the process, making it easier to open, subscribe to, and transfer ISAs. This change would eliminate unnecessary complexities.

Additionally, separating the Lifetime ISA (LISA) allowance of £4,000 from the £20,000 ISA limit would address a common misunderstanding about LISAs and incentivize more investments. Lowering the LISA penalty from 25% to 20% would further encourage savings. This change would particularly benefit self-employed individuals, as it would eliminate the main obstacle to saving for retirement—tying up money with uncertain earnings. An increase in the age at which anyone can open and pay into a LISA, along with a reduced penalty for early access, would significantly aid this group.

Opportunities for ISA Investors

For investors looking to take advantage of a potentially increased ISA allowance, diversification is key to building a resilient portfolio. Consider adding low-cost global trackers for global diversification, bond funds or total return funds for capital preservation during market volatility, and income-focused investments for dividend payments. Those new to investing can start with broad market exposure through low-cost options and gradually add satellite holdings that align with their outlook and interests.

As the ISA landscape evolves, these strategies can help investors make the most of their potentially expanded allowance.

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