Where did it all go wrong for the ‘British Isa’?

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The “British Isa” was launched with much fanfare by former chancellor Jeremy Hunt in his Budget in March.

The aim was to encourage individuals to invest and to help funnel money into UK stocks, which have steadily fallen out of favour with investors in recent years.

But just six months on, the Labour government has axed Hunt’s plans. One government source told the Financial Times that it was “not planning to complicate the Isa landscape even further”.

There are already several different versions of Isas (individual savings accounts) on the market. Cash Isas enable people to save money without incurring income tax on interest, while stocks and shares Isas protect investors from income tax on dividends and capital gains tax when selling shares.

Other types of Isas include Junior Isas for under-18s, the Lifetime Isa for individuals saving for a first home or retirement, and the Innovative Isa, for investing in peer-to-peer lending. Under current Isa rules, set by government, individuals have an annual Isa allowance of £20,000, that can be split across products.

The British Isa would have provided individuals with an extra £5,000 allowance to invest solely in UK companies in the form of stocks and bonds. So where did it all go wrong for the British Isa?

Another Isa makes the market more complicated

Online investment companies that offer Isas, such as Hargreaves Lansdown, AJ Bell and Interactive Investor, have argued that the market must be kept simple otherwise individuals could be overwhelmed by choice and deterred from investing.

Instead of launching another Isa product, some industry players believe the existing range should be shrunk. AJ Bell proposed reducing the number of Isas to just one within which individuals can switch between assets.

James Carter, head of platform product policy at Fidelity International, also said the British Isa would have “proliferated the complexity of the Isa product set”.

“We know that many people find it difficult to identify which products best suit their saving or investment needs and struggle to manage their savings across different Isa types,” he said.

Confusion over transferring money

Experts have argued that the rules around transferring between Isas would have become even more confusing. The former government said in its consultation that it was considering prohibiting transfers from Isas into the British Isa, but admitted that this “could cause some confusion”.

Another option was to allow transfers from the other types of Isas up to the subscription limit of the UK Isa, or even allow unlimited transfers. But this could have made it more difficult for investors and Isa providers to keep track of all the transfers, the consultation paper said.

Investors already invest in UK stocks

Hargreaves Lansdown argued that retail investors are “already enthusiastic backers of British companies”, noting that 80 per cent of equity trades on its site last year were on the London markets.

Rather than launch another product, Hargreaves Lansdown’s chief executive Dan Olley said savers need to be encouraged to put their excess cash to work, as much of the current Isa allowance is not being utilised. He said that “there are over 12mn households who have excess cash that could be invested to improve their long-term resilience, but aren’t doing it”.

Questionable returns

Another chief executive warned that encouraging individuals to put money just into British companies — to help support the domestic economy — was problematic, especially if returns were to lag behind international peers.

Tim Hogg, director at consumer group Fairer Finance, said: “The aim of the British Isa was questionable, as it’s unclear if investing in the allowed assets would have led to higher or lower returns for investors.

“In any case, it’s not clear that the British Isa would have delivered significant further investment into the UK, as investors may have rebalanced their investments rather than invested more of their cash.”

However, some industry players emphasised the need to encourage savers into domestic stocks to help boost stock market returns in the longer term.

“The rationale behind the GB Isa was to create a vehicle that would help drive capital, which has been drying up for decades, into UK plc,” said Gervais Williams, head of equities at Premier Miton Investors. “This need has not gone away.”