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The UK’s largest investment sites have urged the government to overhaul the British savings market in an attempt to channel money into domestic equities, which have suffered from record investor outflows.
AJ Bell told the Financial Times it had sent a policy paper to the Labour government asking it to consider “radical” simplification of the Individual Savings Account market, as well as tax breaks for UK stocks, to encourage retail investors to buy domestic equities.
Michael Summersgill, chief executive of AJ Bell, said in the paper that the government, which is responsible for setting the Isa rules, should allow for one Isa product instead of several different versions, which he said was deterring many adults from investing.
Summersgill said “too much choice can lead to people feeling overwhelmed”, according to behavioural research by AJ Bell, “resulting in low levels of engagement”.
Cash Isas allow people to save money without incurring income tax on interest, while stocks and shares Isas shelter investors from income tax on dividends and capital gains tax when selling shares. AJ Bell has proposed combining these, along with accounts for juniors and the Innovative Finance Isa.
“The UK capital markets face well-documented challenges, yet we have not created an environment that ensures we get the highest possible participation in our own capital markets from our own citizens,” he said.
Dan Olley, chief executive of Hargreaves Lansdown, the UK’s biggest consumer investment site, said it was “essential that we keep things as simple as possible”.
James Carter of Fidelity International said “complexity destroys confidence” and that “further simplification is needed.” Alastair Black, head of savings policy at Abrdn, said “the Isa brand has been stretched too far, with several competing Isa products acting as a barrier to entry.”
The comments come as domestic equity funds continue to lose billions of pounds to overseas shares. Individual investors withdrew a record £1.8bn from UK equity funds in May, according to the Investment Association, a trade body. Coutts said this year it was shifting some £2bn from UK stocks to international rivals.
The outflows are adding to pressure on the London Stock Exchange, which has suffered from a dearth of corporate flotations as companies seek a bigger pool of investors in the US.
Summersgill said “addressing [Isa] complexity seems to me to be the bare minimum any government serious about encouraging greater levels of long-term investing should aim for.”
The Labour party, which came into government this month, said at the start of the year in its plan for financial services that it would look to simplify Isas, but stopped short of providing any detail. Investment sites such as AJ Bell and Hargreaves, which offer individuals Isas and pensions, would benefit from an increase in customers and fund inflows.
However, Hargreaves Lansdown and AJ Bell said they did not support the former Conservative government’s plans for a “British Isa” to funnel money into UK stocks, warning that another product would make the market more complicated.
In AJ Bell’s policy paper, Summersgill said the overall Isa allowance should be increased from £20,000 to £25,000, as this would “naturally drive more money towards UK plc”.
Research by HM Revenue & Customs shows roughly 3mn people have more than £20,000 in a cash product and nothing in a stocks and shares equivalent, meaning savers could be earning more while supporting UK equities if they channelled some of this cash into shares.
Investment sites have also argued that dropping stamp duty — which is levied at 0.5 per cent for investments of more than £1,000 in most UK stocks — would help create another incentive to buy British shares.
Summersgill said an “even more radical” idea would be to extend inheritance tax exemption beyond investments in small companies listed on the alternative market to all UK shares and domestic equity funds.
“If Labour can grasp the nettle by radically simplifying Isas, it can establish a foundation upon which the future prosperity and ultimately UK businesses can be built,” Summersgill said.
The Treasury said: “There’s no time to waste to fix the foundations of the economy, which is why we’ve taken immediate action to boost investment and economic growth. We will also take action to reinvigorate our capital markets to support this.”