AJ Bell has called for a radical overhaul of the UK’s ISA system in a new policy paper.

In proposals presented to the Chancellor, the investment platform has outlined a system which would see all existing ISAs consolidated into a single “One ISA” product.

AJ Bell believes the move would help make it easier for people to save and invest while also giving policymakers the flexibility to incentivise a wider range of savings goals.

There is a growing savings gap in the UK, as the emphasis for long-term saving shifts from employers and the state to individuals. FCA research revealed that in May 2022, 12.9 million UK adults – one in four (24%) – had low financial resilience, a significant increase of 2.2 million since February 2020. These are people in financial difficulty or who could quickly find themselves in difficulty if they were to suffer a financial shock.

FCA data has also shown there are an estimated 8.6 million consumers holding more than £10,000 of investible assets in cash and has set itself a target of reducing this number by 20%.

Furthermore, new research by AJ Bell showed that almost 25 years on from their launch, ISAs have become a recognisable and trusted savings vehicle, with 96% of UK adults saying they had heard of ISAs, and 71% stating they are familiar with them.

AJ Bell co-founder, Andy Bell, commented: “The UK needs to act to close the savings gap and ISAs are the perfect product to help people build their financial resilience and prosper in the future. But they are currently too complicated – savers are faced with too much choice. Instead, they need a simple solution to help kickstart their savings.

“The government now has an opportunity to save ISAs from being suffocated by incremental complexity, eradicating the tax and product complexity that could eventually see ISAs turned into a political football in the same way as pensions taxation.

“A One ISA system would help to encourage competition, making it easier for customers to compare just a single type of ISA product and switch between different providers.”

AJ Bell has set out a blueprint for a single ISA solution encouraging more people to save for their futures. Its new One ISA tax wrapper would provide tax-free growth and income, with a £20,000 annual subscription limit for everyone over the age of 18. One ISA users would be able to hold both cash and investments inside their accounts, with no restrictions on transfers between providers.

A flexible bonus system would enable governments to provide a top-up when money in the account is used for a specific purpose. Similar to the existing Lifetime ISA bonus, AJ Bell suggested this could be used to support first-time house buyers, as well as being expanded to provide government tops-ups for other purposes like paying for green home improvements, long-term care or vocational training.

“The introduction of a government bonus within Lifetime ISAs has added significant complexity to ISAs and there is a strong argument that removing the bonus and effectively abolishing Lifetime ISAs would make ISAs significantly simpler for consumers and less open to political interference,” Bell added.

“However, the bonus does provide an incentive to save so if it were retained following ISA simplification, the government should consider making it more flexible and extending its reach.

“A flexible bonus system would allow the government to implement a range of different incentives, which could be adapted as the needs of the economy change, and which grow and adapt as people’s savings priorities change through life.

“From funding long-term care, to subsidising skills training, or funding green home improvements, the flexible bonus within a single savings product available to everyone in the UK would create a more dynamic savings vehicle fit for the future.”

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