In today’s Budget announcement – and his final one before the 2015 general election – the chancellor promised a “radically more flexible” ISA system by announcing that savers will be able to take money out of their cash ISA and then replace it later without being hit by any tax penalties.
This comes with an increase in the annual tax-free allowance for the products.
Osborne (pictured) said: “In two weeks’ time the changes I’ve already made mean people will be able to put £15,240 into an ISA. But if you take that money out – you lose your tax free entitlement, and so can’t put it back in.”
“This restricts what people can do with their own savings – but I believe people should be trusted with their hard earned money. With the fully flexible ISA people will have complete freedom to take money out, and put it back in later in the year, without losing any of their tax-free entitlement.”
The announcement was well-received by the investment community.
Henry Cobbe, managing director of the BirthStar Target Date fund range, said: “This is a good Budget for savers and reflects the ambition of the UK’s financial success to be founded on savings rather than debt.”
“If the 2014 Budget could be called the ‘Pensions Budget’ the 2015 version might be dubbed the ‘Savings Budget’. The new fully flexible ISA, where savers can take money out and put it back in within the same tax year, will help incentivise people to save.”
Research by Fidelity found that savers dip into their ISAs three times a year on average, with this rising to six times for those in the 20s and 30s.
Maike Currie (pictured), associate investment director at Fidelity Personal Investing, said: “On the face of it the flexibility to take out money in the same tax year, without losing the tax-free status of their savings, therefore looks like a big win.”
“However, unless you were using your full ISA allowance each year, this newfound flexibility will make very little difference to you as you will still have some of your ISA allowance left to use.”
The change will be implemented in the autumn of 2015, following a consultation with ISA providers.
In addition, there were promises to widen the selection of investments that can be held in an ISA. Listed bonds issued by a co-operative society and community benefit society will become eligible, for example, while the Government is looking into allowing crowd-funding investments to also be held.
Possibly the largest change in this area was the introduction of the Help to Buy ISA, which is designed to help savers get onto the first rung of the property ladder.
“We’re going to take two of our most successful policies and combine them to create a brand new Help to Buy ISA. And we do it to tackle two of the biggest challenges facing first time buyers – the low interest rates when you build up your savings, and the high deposits required by the banks,” Osborne said.
“The Help to Buy ISA for first-time buyers works like this. For every £200 you save for your deposit, the Government will top it up with £50 more. It’s as simple as this – we’ll work hand in hand to help you buy your first home.”
Help to Buy ISAs, which will be available from the autumn, will offer a maximum bonus size of £3,000 per person and can be used towards home purchases of up to £450,000 in London and up to £250,000 outside London.
Investors can save up to £200 a month into them and money can be withdrawn to use on other projects – although the bonus will only be made available for house deposits. However, it is opened as a cash ISA, which means investors will not be able to seek higher returns on their deposit through investing.
Mark Hayward, managing director of the National Association of Estate Agents, said: “This initiative will provide a significant boost to the ability of a first-time buyer to save speedily and effectively.”
“This is exactly what is needed to engage the first-time buyer market, particularly as we have seen the current criteria under the mortgage market review constraining aspirations to buy a home. It especially benefits couples who are buying for the first time as both are eligible to open a Help to Buy ISA which potentially means £6,000 from the Government bonus towards a new home.”
“It is also timely, considering house price inflation outpaces wage inflation, so this additional boost to first-time buyers savings pots will help them at least keep apace rather than fall behind the inflationary curve.”
Rick Eling, senior client fund manager at Sanlam, welcomes the move in principle but is less enthusiastic about what it means in reality.
“Encouraging people to save in any format is positive, but we fear that the Help to Buy ISA will divert money away from shares, bonds and other assets into an already overvalued asset class,” he said.
“British house prices need no encouragement to keep rising to ever-higher multiples of salaries. We have supply-side constraints, so extra demand can only lead to further home inflation and further problems down the line.”
Fidelity’s Currie also points out that the new product will not solve the problem it is designed to address.
She said: “The challenge of getting a foot on the property ladder is largely an issue of supply and demand – there are more first-time buyers, than homes. Boosting their savings is a noble cause but that won’t solve the housing shortage problem.”
Given the multitude of changes to the ISA system over recent years, Adrian Lowcock, head of investing at AXA Wealth, says the Government should now be wary of any further radical overhauls.
“Whilst this announcement is good news we do need to be wary of damaging the success of ISAs by trying to make them all things to all people. The ISA is successful because of its simplicity, yet for many it still remains too complicated. In the future the government need to ease off on the tinkering and focus on the communication of the benefits of ISAs.”
It wasn’t all good news in the Budget, however. In a move that was leaked ahead of the speech, Osborne reduced the pension lifetime allowance for the third time since the coalition took power.
The allowance will drop from its current £1.25m to £1m in April 2016. The allowance was cut from £1.8m to £1.5m in April 2012 then to £1.25m in April 2014.
John Blowers, head of Trustnet Direct, said: “The reduction in the lifetime pension allowance from £1.25m to £1m is a body blow to those looking to build a decent retirement fund and flies in the face of having to save more as we live longer.”
“Clearly, there are other ways to build a pension pot and investors looking to build larger retirement funds can use the generous ISA allowance to bolster their options over time, but one wonders whether this reduction was more politically motivated.”
Steven Cameron, regulatory strategy director at Aegon, says it is “disappointing” to see the Government take another short-term approach to pension tax by cutting the lifetime allowance.
“A £1m pension pot may seem huge, but with improvements in health and life expectancy, people who retire at 60 may need to use their pension income to cover their costs for 30 years or more. If you want your pension to continue to your partner and rise with inflation, £1m will buy you less than £30k a year. Many people aspire to more than that,” he said.
“As people live longer, Government should be encouraging them to build up adequate savings for longer lives including paying for very expensive long-term care. Reducing the amount that can be saved in pensions is, in our view, a move in the wrong direction.”
Nick Hungerford, chief executive at Nutmeg, is another that is critical of the decision to lower the allowance.
Although it looks like the government is hitting pensioners with this lower lifetime allowance, this system discourages sensible, regular investing over a long time period. It penalises good investors who have started early and regularly invested well over their lifetime, building up a big retirement pot,” he said
“We call for the government to base the lifetime allowance on private pension contributions and not on the total value of pension pots. It's really important for the government to address this issue and stop punishing sensible investors.”