LISA0181
Written evidence submitted by The Association of Investment Companies (AIC)
The Association of Investment Companies (AIC) is the trade body for the closed-ended investment company sector. We represent 313 investment companies, holding assets of over £241billion on 31 December 2024. The AIC’s members are predominantly listed on the Main Market of the London Stock Exchange, where they make up the largest single sector of the market by number of companies. They account for more than a quarter of the FTSE 250. Some of our members have their shares on the Specialist Fund Segment (SFS); others are quoted on AIM. The AIC’s members include investment trusts, Venture Capital Trusts (VCTs), UK Real Estate Investment Trusts (REITs) and non-UK companies. Our non-UK members are predominantly incorporated in Guernsey and Jersey.
Investment companies are collective (or pooled) investment vehicles. They pool their shareholders’ capital and invest in a portfolio of assets to spread risk and generate an investment return. Investments include listed securities and alternative asset classes, such as infrastructure, renewable energy, private equity, debt, venture capital and property. Investment in property can be direct or take the form of investment in a company owning property.
There are currently 5 different types of Individual Savings Account (ISA) available, the stocks and shares ISA, cash ISA, innovative finance ISA (IFISA), junior ISA and the lifetime ISA (LISA), with a sixth, the Help to Buy ISA, closed for new subscriptions. Each type of ISA has its own set of rules, some of which are very detailed and complex.
The sheer multiplicity of ISAs creates confusion in the minds of investors. AJ Bell conducted research in March 2023 and found that 49% of the UK adults surveyed think the different versions of ISAs makes them too complicated. It found that although cash ISAs had some recognition, fewer than half of UK adults surveyed could recognise the other types. AJ Bell reported that financial advisers had similar concerns with the vast majority supporting ISA simplification. 65% of advisers believed that unnecessary complexity had crept into the ISA market and 77% thought that this was down to “too many variants and names” for ISA products. AJ Bell concluded that ISA complexity risks putting people off saving and investing for the long term.
HMRC’s annual savings statistics (September 2024) show that around 12.4 million adult ISA accounts were subscribed to in 2022 to 2023, up from 11.8 million in 2021 to 2022. The number of cash ISAs subscribed to increased by 722,000. As a result, the share of accounts subscribed to in cash has risen to 63.2%, a 2.5% growth from 2021 to 2022. Meanwhile, the number subscribing to stocks and shares ISAs decreased by around 126,000.
HMRC annual savings statistics (September 2024) indicate that around £71.6 billion was subscribed to adult ISAs in 2022 to 2023, an increase of £4.7 billion compared to 2021 to 2022. This increase was driven by the rise in cash ISA and LISA subscriptions, which grew by 34.7% (£10.7 billion) and 10.1% (£0.2 billion), respectively. Conversely, the amounts subscribed to stocks and shares ISAs has decreased by £6.2 billion since 2021 to 2022.
Labour’s Financing Growth: Labour’s Plan for Financial Services (January 2024) indicated that Labour would look to simplify the ISA landscape to make it as easy as possible for people to feel the benefits of saving and investing their money, including through increased utilisation of stocks and shares ISAs.
Given this broader context, the AIC recommends that the select committee considers other aspects of ISA reform, as well as the LISA. This should include considering the future of the cash ISA and the IFISA.
Analysing the role of different types of ISA, and their broader costs and benefits, is made more difficult by gaps in HMRC’s ISA data. As discussed below, the AIC is unconvinced that the current range of ISA’s available is appropriate. The costs and benefit would be easier to assess if data (for example, on the income of subscribers for different ISA types) was available. The AIC recommends that the select committee considers gaps in the public data and encourages HMRC to provide additional information to support a broader review.
The Financial Conduct Authority’s (FCA) Financial Lives Survey 2022 found that the most commonly held investment products in May 2022 were shares/equities (21% held) and stocks and shares ISAs (17% held) with only 1% holding a LISA that is invested in stocks and shares and 0.5% in an Innovative Finance ISA.
The AIC recommends that the LISA should be abolished. It is used primarily as a savings vehicle for first time property buyers who would be saving anyway for their first property. They can use other ISA options for this purpose. Adding another tax-free savings option mainly used for house purchases is not value for money for the government. It is unclear why special provision needs to be made for house purchases, particularly as the additional tax relief provided is likely to top-up existing savings options. A report in January 2023 “ISA ISA Baby” from the Resolution Foundation and abrdn Financial Fairness Trust reported that data from the Wealth and Assets Survey suggested that, in 2018-20, 47% of LISA wealth was held by individuals in the top household income quintile (page 25), suggesting that government support is mainly assisting savers who do not need government help.
In 2018, just a year into the LISA’s existence, the Treasury Select Committee called for its abolition, citing too much complexity and a lack of popularity.
Paragraph 122 of its report said
“This inquiry has received strong criticism of the Lifetime ISA (LISA) over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers. The government should abolish it.”
Although the LISA is primarily used as savings vehicle for first time buyers, its dual purpose as a pensions savings product creates complexity and confusion with other pension products available and potentially undermines pension autoenrollment.
The complexity of the LISA, including the financial penalties for withdrawal (which are greater than the government bonus), and the fact that the house price cap has not been increased since it was introduced in April 2017, mean that it is not fit for purpose. The inability for joint buyers using a Lifetime ISA to combine the house price cap makes its use less effective, particularly in London and the South East where property prices are higher.
The AIC recommends that the cash ISA should also be abolished.
HMRC’s non-structural tax statistics December 2024 indicate that the cost to the government of the ISA scheme in 2022-23 was £5.1 billion, the cost in 2023-24 was £7.7 billion, with an estimated cost in 2024-25 of £9.4 billion. It is noted in those statistics that the large increases are due to rising interest rates, and policy decisions to decrease the dividend allowance from £2,000 to £500 and the capital gains annual exempt amount from £12,300 to £3,000 (this figure is not broken down according to the type of ISA).
The Financial Lives Survey 2022 – (page 33) found that 58% of adults with £10,000 or more held all or at least three-quarters of their money in cash savings and not in investments – up from 55% in 2020. This suggests that that a significant proportion of wealthier adults were holding far more money in cash than is likely to be needed for an emergency savings buffer. Over time, these consumers are likely to have the purchasing power of their savings eroded by inflation. They could potentially make their money work harder if they engage more with their finances and consider investing.
The ISA statistics do not provide a full breakdown of the different types of investors holding the various types of ISA. However, the AIC suspects that many of those using Cash ISAs are unlikely to receive an income which justifies them using their ISA allowance for cash savings. The AIC has separately recommended, above, that the select committee should review data available and ask HMRC to fill gaps such as this.
Basic-rate taxpayers receive a personal savings allowance of £1,000 to shelter interest on cash savings while higher-rate taxpayers receive a personal savings allowance of £500. Even with higher interest rates, the personal savings allowance is sufficient to accommodate interest on emergency cash savings for the majority of the UK population.
Cash ISA subscriptions are consistently and significantly preferred by retail investors over stocks and shares ISAs. In 2021/22 cash ISAs represented 61% of all ISA subscriptions. Usually, they are favoured even more strongly. (Commentary for Annual savings statistics: June 2023. Official Statistics. June 2023.)
Encouraging retail investment in capital markets is particularly important with the recent levels of higher inflation. Over reliance on cash savings is likely, over the longer term, to result in the value of savers’ resources being eroded, reducing individuals’ financial resilience. Exposure to stock markets can protect against this risk.
Abolishing the cash ISA would encourage investors to make more use of the stocks and shares ISA or a UK ISA (see below). This, in turn, would mean that investors are less likely to have their money eroded by inflation. Less well-off investors who currently invest in cash ISAs are likely to be able to shelter interest on emergency cash savings with their tax-free interest allowance. Where abolishing the Cash ISA does encourage investment in equities, this could support UK capital markets and the businesses whose shares are traded on them.
The abolition of the cash ISA could also free resources to create ISA options that directly support the UK economy. The potential to create a UK ISA is discussed below.
In the event the cash ISA is not abolished, the AIC recommends that the maximum subscription to a cash ISA is reduced to £5,000. This would go some way in delivering the benefits identified above, including increasing levels of equity investment.
HMRC’s commentary for annual savings statistics: September 2024 show that only 17.000 IFISAs were opened in the tax year 2022-23, the same number reported in 2021-22, which was a slight increase on the 16,000 opened in 2020-21. The IFISA can only be seen as a niche product for esoteric assets, which have struggled to gain mass-market popularity. The use of the ISA framework to support investment in these asset classes is questionable.
The AIC recommends the abolition of the IFISA as the complexity and confusion that IFISAs introduce to the ISA framework is not justified.
Once the current landscape has been simplified this will provide options to consider if there are merits in using the ISA scheme to support a more limited, and more coherent use of tax-free savings to deliver the government’s objectives.
Other parts of the tax system, for example, the personal savings allowance, will support cash savings, particularly for the less well off. The stocks and shares ISA provides incentives to support long-term investment to improve financial resilience in advance of retirement.
The government should consider reallocating some of the savings achieved by abolishing LISA, IFISA and abolishing/reducing the cash ISA to support its growth agenda. The AIC recommends that consideration be given to creating a UK ISA with an additional annual allowance of £10,000.
Eligible investments for a UK ISA would be limited to all ordinary equity share classes listed or admitted to trading on a UK recognised stock market. They would be eligible regardless of the place of incorporation of the issuer, the location of its activities or investments and whether it is a collective investment vehicle or trading company.
Creating a UK ISA would:
Developing businesses tend to have different finance needs at different times. This is recognised by the government’s support for a range of schemes which help provide growth capital, including the tax reliefs provided to VCTs, Seed Enterprise Investment Schemes (SEIS) and Enterprise Investment Schemes (EIS). This perspective is also shown in its support for various programmes administered by the British Business Bank.
The ambition of these schemes is to help UK businesses evolve to the position where they can utilise other, non-government supported, financing options. This includes listing on the UK’s public stock markets. Increasing potential demand for UK stocks will make UK markets a more attractive fund-raising option (including in comparison with their international competitors). Engaging the broadest range of investors, including domestic retail shareholders, in shareholding is part of this process; and
There is a risk that crypto assets (and other high-risk and speculative assets) will continue to increase in popularity at the expense of shares. These assets may be suitable for professional and a very limited number of private investors, but most retail purchasers are unlikely to benefit in the long-term. They are more likely to have their financial position damaged. Younger investors are particularly attracted to the novelty and excitement of making higher-risk investments. They often do not understand the risks and are vulnerable to scams. Their interest is rising despite, as the Treasury Select Committee put it, many of these assets having “no intrinsic value” and having characteristics which “more closely resemble gambling than a financial service”. MPs recommended regulating the sector accordingly (Regulating Crypto. House of Commons Treasury Select Committee. Page 3).
In conclusion, the AIC believes that a UK ISA should help make UK public markets attractive to all issuers, irrespective of their place of incorporation. This will maximise their value to UK businesses seeking to access public markets to raise capital to fund their further growth. It will help ensure that the UK’s success in encouraging start-ups and growth companies, in fintech, biotech and other technology, does not end up benefiting overseas stock exchanges because a listing outside the UK is commercially more attractive.
The AIC recognises that refocusing government support from the cash ISA, LISA and IFISA to a UK ISA does reintroduce some complexity to the ISA landscape as whole. However, the overall ISA environment would be far simpler. The rules for a UK ISA would be very similar to a stocks and shares ISA but with eligibility being limited to shares admitted to trading on UK public markets. Moreover, the trade-off of encouraging investment into the UK markets and supporting those markets would outweigh any additional complexity.
Critics may argue that a UK ISA will force UK investors to invest in UK markets where this may not be in their best interest. The AIC disagrees. Companies traded on UK public markets are not necessarily UK companies and may not have UK operations. Pensions and stocks and shares ISA are not UK focussed, and the government provides ample incentives that allow globally focused investment. If investors wish to continue to invest in non-UK markets, then they can continue to do so, but without additional tax incentives from the government. However, if the investor chooses to invest in UK markets then this would be rewarded with tax incentives. This recognises the direct benefit that such investment provides to the UK economy and society.
Questions raised by the call for evidence
For the reasons mentioned above, the AIC does not believe that the LISA is fit for purpose and believes that it should be abolished. It is not an effective use of government support.
The AIC is not in a position to answer this question.
The LISA is used primarily as a savings vehicle for first time property buyers who would be saving anyway for their first property and, in that context, cannot be seen as value for money for the government. As previously mentioned, the report ISA ISA Baby stated that data from the Wealth and Assets Survey suggested that, in 2018-20, 47% of LISA wealth was held by individuals in the top household income quintile (page 25).
The AIC does not believe it is a suitable savings product. It is primarily used as savings vehicle for first time buyers. Its availability to be used as a pensions savings product creates confusion with other pension products available.
Yes, the AIC recommends that the LISA should be abolished. As previously mentioned, in 2018, the Treasury Select Committee called for its abolition, citing too much complexity and a lack of popularity.
At paragraph 122 of its report said
“This inquiry has received strong criticism of the Lifetime ISA (LISA) over its complexity, its perverse incentives, its lack of complementarity with the pensions saving landscape and its apparent lack of popularity with the industry and pension savers. The government should abolish it.”
If the LISA is retained, the AIC believes that the withdrawal penalty should be removed. The penalty is greater than the government contribution as it amounts to 25% of the total investment, including the principal and any growth. It is reported that a freedom of information request submitted by MPowered Mortgages found that just 12% of LISA savers have successfully used their account to buy a home, while 185,000 have collectively been fined £127 million for making unauthorised withdrawals. The average penalty was £684, including lost interest.
If the LISA is retained and the relevant conditions are breached, the government support should be withdrawn with no other penalty.
The AIC recommends that the LISA should be abolished.
If the LISA is retained, the AIC believes that the house price cap should be raised in line with inflation. The house price cap has not changed since it was introduced in 2017 despite high inflation. According to the Land Registry Statistics, between December 2017 and November 2024 the average house price in England rose by 29%. It is particularly unfair that the same house price cap applies where there are joint buyers using their LISA.
If the LISA is retained, the annual limit should be raised in line with the inflation.
The AIC has no comment on this question.
February 2025