ISA freeze?

1st November 2013

The Treasury has been talking about an ISA cap.

The Treasury has been consulting with financial services companies about the possibility of a cap on the amount that can be held in ISAs according to reports in one national newspaper. A figure of £100,000 was allegedly suggested by one Treasury official. There have been no denials from the Treasury, which has said it was just listening, not putting forward any firm proposals.

The idea of putting a cap on ISA investment is not new. When ISAs were first proposed as a replacement for PEPs (Personal Equity Plans) back in the late 1990s, there were suggestions that a combined ISA/PEP ceiling of £50,000 should be introduced. The outcry which followed prompted the Chancellor of the time, Gordon Brown, to back down. The return of a cap consideration now is unsurprising, given the value of ISA funds had reached £443bn by the start of this tax year and the annual income tax cost to the Exchequer is put at £1.75bn. That cost could increase significantly when interest rates start to rise.

With pension allowances being cut again from next April, ISAs could be the next savings vehicle to which the Treasury takes the axe. There are some ISA millionaires, reportedly a concern for the Treasury, but the numbers are almost certainly very small: if you had invested the maximum in PEPs and ISA from January 1987, your total contributions would amount to £212,320 and you would have needed an annual return of nearly 12% after all charges to hit a seven figure value now. The £100,000 target is clearly much easier and one estimate is that it would catch around 2% of all ISA investors.

Will it happen? If anything, an ISA cap looks more like an immediate post-election move rather than something that will happen soon. Nevertheless, as Mr Osborne has announced that he will be presenting the Autumn Statement on December 4, you might want to think about making this year’s ISA contribution in November rather than waiting for next March.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.