The ISA landscape has been a conundrum for successive governments, with experts warning that too many products are causing headaches for savers and actively risk putting some people off making good choices with their money.
But when it comes to the gold standard, many experts point to one country that is getting it right: Sweden. The country introduced a single, flexible account called the Investeringssparkonto (or ISK for short) and it is the most successful savings vehicle in Europe, according to statistics from New Financial.
So how does Sweden’s ISK work? It is a general investing account that works a bit like an ISA, although the tax implications are different. Investors don’t pay tax on capital gains or dividends. Instead, they pay tax each year on an assumed return (known as the schablonintäkt), calculated from the account’s value and the Swedish government borrowing rate. This assumed return is taxed at 30%, whether the account rises or falls in value.
The benefits are that it allows people a centralised account with which they can invest in funds, shares and cash. There is also no upper limit, so people can save as much as they like in these wrappers and the tax is calculated automatically, so investors do not need to work out their gains or losses.
Maximilian Bierbaum, head of research and director of the EU programme at New Financial, noted that the firm’s success metric is the value of assets in each account relative to GDP in the first 10 years after the launch.
“By this definition, the Swedish ISK account is by far the most successful account in our sample. Ten years after its introduction, the value of assets held in Swedish ISKs reached 29% of Swedish GDP and that was more than double the level of assets held in the second most successful account, the TFSA, or tax-free savings account, in Canada,” he said.
He noted the product has a “unique combination of flexible features” including no annual deposit limit, no lifetime deposit limit, no minimum holding periods and almost no restrictions on what investors can put their money in. All this, while also avoiding capital gains and income tax.
I understand that ISA reform is hard and might not be the most popular thing in the world at first. But this is something the chancellor should consider seriously in his upcoming Budget. At present there are too many choices. Cash, stocks and shares, lifetime, junior and innovative finance are all ISA options that can be opened today, while people can still save into a help to buy ISA if they have one.
Bierbaum’s solution: “Copy Sweden”.
We are at least trying something similar elsewhere. Take pensions for example, where Sweden has its act together. Samantha Ricciardi, head of EMEA at Fidelity, noted the country has an app where people can see all their pensions, collate them and then model their future retirement.
“That makes a huge difference in people’s minds when they see, ‘Oops, when I’m 65, if I keep this way, I will have 600 kronor a month’. That kind of is a wake-up call to say it’s not going to be enough,” she said.
This was, I assume, at least the loose inspiration for the UK pensions dashboard, which has faced significant setbacks and criticisms since it was announced in 2016. Targeting a completion date in 2019, we’re still waiting.
There is now only a month to go before all UK pension schemes and providers are supposed to be signed up to the ecosystem (the deadline is Halloween, a scary proposition for some of the pension firms I am sure). We shall see how that goes.
But the government shouldn’t let the mishandling of the pension dashboard put them off attacking ISA rules. The problem isn’t the tools – Sweden proves that. It’s the people in charge of getting these things online and working.
Jonathan Jones is the editor of Trustnet. The views expressed above should not be taken as investment advice.