I was shocked to read at the weekend in this article on This is Money that the chancellor is urged to cap ISAs at £100k. Shocked but I agree in part. They do benefit the rich, not the poor. But it fills me with dread as it’s a pillar of our own financial independence.
First of all: If you don’t know what ISAs are, go to the gov.uk website and read up.
Essentially it’s a tax-free wrapper, open to everyone with a £20,000 limit a year. There’s different types (cash ISAs, JISAs, LISAs) but the key thing is that you can save money, invest it and pay no dividend or capital gains tax.
ISA ISA Baby
The news story from the DailyWail related This Is Money – so it is knee-jerk is from the Resolution Foundation report https://www.resolutionfoundation.org/publications/isa-isa-baby/. You can download the PDF for free at this link https://www.resolutionfoundation.org/app/uploads/2023/01/ISA-ISA-baby.pdf and it makes interesting reading.
In summary, it turns out that the higher your income, the more likely you are to have money to save into an ISA. Fancy that. So the tax-benefits of ISAs fall mostly to the already well-off. Far from being a tool for the masses to save and get rich, it’s nice freebie for the already wealthy.
There are still good reasons to encourage saving. The UK has a crap savings rate, concerningly low – and the slow puncture of Brexit is making it harder for us to avoid a decline in living standards, we’re already living on borrowed future income.
However, is it fair that most financial support goes to the most well-off families? And remember that the graph below doesn’t show any of the untaxed housing wealth (my own house has “gone up” by about £70,000 in 7 years. Tax that at a meagre 10% and I’d have another £1,000 tax bill a year. A preposterous idea? Then who should pay tax, people or assets? I know what I as a person would say.
Personally, I have tried to fill my ISAs as much as possible over the years. I wish I’d started earlier but I was tricked by the change in the 0% dividend tax rate that changed to 7.5% (now 8.75%) and I also cashed in my ISA for a housing deposit – probably a familiar story for readers?
However, the problem that I have with this report is that if ISAs are limited to say £100,000 – like a lifetime allowance type of thing, it pulls one of the legs of my own financial plans. You might be saving into an ISA because you can’t afford a house – and with the “average” house costing about £300,000 (which is tax less than other assets and can appreciate tax free), £100,000 isn’t that much is it?
Also, you might not have the choice between buying a house and investing in an ISA. It means some folk get to have their cake and eat it too and if you have more than £100,000 – you pick up the bakery bill. It’s not right, is it?
Another report by the Resolution Foundation
This graph shows the share of individuals with less than one month’s income as savings. The young are broke (although, interestingly, GFF is now in the 40-49 cohort, making me an old fart). But still, of those in their 40s, more than 4 in ten have next to nothing saved away. Add on no housing equity, and you have a nation sleepwalking into old age penury!
Changes from 2010
Turns out that austerity has meant that kids are on average £1,500 worst off and pensioners are £500 better off. Seems like the old (not me) are having it too easy. Add to that the inputted rent from their houses bought on the cheap decades ago, and pensioners are earning out earning non-pensioners as their incomes rise and everyone else’s stagnates.
Wealth By Age
Pensioners have had two great advantages over the young. One is property and the other is pensions. The average family wealth per adult for a 65-74 year old puts pension wealth is £238,000. That’s 10 times the average for 20-29 year olds. Quite a sum. And they can access that wealth and pay half the rate of tax than a working age person who works for their money (25% tax-free lump sum and 20% income tax = 15% tax versus 20% income tax + 12% National insurance = 32% tax).
The disappearance of final salary pensions and other factors mean that pension savings are declining over time for younger cohorts. Something which the government (through auto-enrolment) is trying to fix but the real problem is that median incomes aren’t rising enough to cover the costs and many people (those who have no spare cash) can’t afford to save for a retirement.
Back to Housing
It turns out that the young are not only paying more of their net income on housing costs than previous cohorts, but they’ve been stung by throwing that money away on rent payments instead of putting it into home equity. The effect month by month might be small, but over time, it creates a devasting legacy of pampered pensioners and impoverished youngsters.
And Back to ISAs
ISAs are very generous – arguably the LISA shouldn’t exist. Being able to save £20,000 a year in a tax-free manner is worth a lot. Even at the 8.75% tax rate for dividends, a portfolio yielding 4% a year or £800 will save you £70 a year in dividend tax. If you invest in an ISA for say a decade and assume a 4% yield and 3% growth, you can have a nice income of over £9,000 a year. The tax on that is £827 for a lower rate tax payer or over £3,000 for a higher rate tax payer. That saving in tax only compounds over time.
The benefits of saving in an ISA should not be underestimated. If Financial Independence (on your own steam) is a marathon and not a sprint, ISAs can give you a boost for when life starts to get hard.
But ISAs are overly generous and the limit of £20,000 is massive. If you can save £20,000 a year, do you really need the help? Could it be better for society that the wealthier lose their tax-free privileges and that money is spent elsewhere? I would say yes. However, think back to the tax-rates that working age and pensioners are paying. Someone on £40,000 a year PAYE is paying 32% tax (plus 9% student loan anyone?) while a pension is paying only 15%. Would it not be fairer for pensioners to pay National Insurance – maybe at a reduced 5%. After all, they are the ones receiving the state pension & clogging up the NHS.
Why should people who work for their money be taxed more than those who don’t?
Going after the ISA might be low hanging fruit – easy feather to pluck from a fattened goose. But, the potential for raising billions from pensioners is there. The inter-generational disparities between young and old make not only a sound financial case (it’s easier to raise money from those who have it), but a moral case too. It’s preposterous to have pensioners paying less tax, enjoying tax free house price gains and getting the triple-locked pension while working age people pay more tax, rent their way through life and get guaranteed below-inflation pay rises.
The choice is clear for me. We need a tax system that taxes equally. But it won’t happen. Then again, it’s not like the Tories listen to the Resolution Foundation, so the good(ish) news is that your ISA might be safe for another year or two yet.
Good luck, GFF