Martin Lewis: Is the £20,000 cash ISA limit about to be killed off?

Ultrasonic

masonic said:

Ultrasonic said:

Rather than focusing on the yearly amount that can be saved in cash ISAs, I actually wonder if just setting a limit on the total any individual can have in ISAs might make sense?

ISTR a £100k cap was wheeled out as a Bogeyman previously, but was shot down relatively quickly.

It would be interesting to know what the basis of this was?

I mentioned it as this feels like the real way to limit too much money being kept in savings, as distinct from a per-year cap. 

Ultrasonic

intalex said:

On the other hand, capping the principal would be impractical (virtually impossible) to implement, not just the initial ordeal of bringing everyone's total cash ISA balances down to under that cap, but also to track whether anyone exceeds the cap (e.g. simply by interest paid into the ISA).

That last part could surely trivially be managed by not allowing interest to be paid into the ISA itself?

masonic

Ultrasonic said:

masonic said:

Ultrasonic said:

Rather than focusing on the yearly amount that can be saved in cash ISAs, I actually wonder if just setting a limit on the total any individual can have in ISAs might make sense?

ISTR a £100k cap was wheeled out as a Bogeyman previously, but was shot down relatively quickly.

It would be interesting to know what the basis of this was?

I mentioned it as this feels like the real way to limit too much money being kept in savings, as distinct from a per-year cap. 

Ultrasonic said:

intalex said:

On the other hand, capping the principal would be impractical (virtually impossible) to implement, not just the initial ordeal of bringing everyone's total cash ISA balances down to under that cap, but also to track whether anyone exceeds the cap (e.g. simply by interest paid into the ISA).

That last part could surely trivially be managed by not allowing interest to be paid into the ISA itself?

I believe that was the original proposal that was floated, and was not just for cash ISAs, but it went down like a lead balloon. Difficulties are that ISA managers don't know what subscriptions are held elsewhere, so would need a central real-time reporting system if the aim would be to prevent subscriptions when the balance is across all ISAs is >£100k (and this would be the simplest implementation). Those already above the limit would just not be able to add more. It would have legs if you could only hold one cash ISA at any time (noting some would wish to limit themselves to FSCS £85k compensation limit in that case). But again does nothing to address the intergenerational advantage afforded to those already having had time to build very large balances (thinking of someone like me in my 40s vs someone in their 20s).

MeteredOut

Ultrasonic said:

intalex said:

On the other hand, capping the principal would be impractical (virtually impossible) to implement, not just the initial ordeal of bringing everyone's total cash ISA balances down to under that cap, but also to track whether anyone exceeds the cap (e.g. simply by interest paid into the ISA).

That last part could surely trivially be managed by not allowing interest to be paid into the ISA itself?

No, we cannot assume that would be trivial. If the ISA provider does not provide a "pay away" facility (ie, pay interest into another account), then we cannot assume they could implement that by the start of the next tax year.

And, as above, there would be no way for a single provider to limit holdings across providers to £100K without a cross-industry platform where all subscriptions are shared. And that would be a multi-year implementation. It would take significant time even to agree how the development of such a platform would be funded, both for delivery, and for ongoing maintenance.

Ultrasonic

How would information sharing to ensure a hypothetical total ISA saving limit isn't exceeded be any different to the current situation of ensuring that contributions in a single year don't exceed £20k (as this can also now be split across multiple ISAs with multiple institutions)?

Ultrasonic

MeteredOut said:

Ultrasonic said:

intalex said:

On the other hand, capping the principal would be impractical (virtually impossible) to implement, not just the initial ordeal of bringing everyone's total cash ISA balances down to under that cap, but also to track whether anyone exceeds the cap (e.g. simply by interest paid into the ISA).

That last part could surely trivially be managed by not allowing interest to be paid into the ISA itself?

No, we cannot assume that would be trivial. If the ISA provider does not provide a "pay away" facility (ie, pay interest into another account), then we cannot assume they could implement that by the start of the next tax year.

Well, it could simply become a requirement, with those not being able to or choosing not to sort this in time not being able to offer ISA products.

masonic

Ultrasonic said:

How would information sharing to ensure a hypothetical total ISA saving limit isn't exceeded be any different to the current situation of ensuring that contributions in a single year don't exceed £20k (as this can also now be split across multiple ISAs with multiple institutions)?

Providers currently know everyone has a £20k allowance and they police contributions into their own ISAs without the knowledge of contributions elsewhere. Nobody contributing to a single ISA is permitted to breach the allowance. This system is already quite flawed and creates a large burden for HMRC to follow up with individuals who have breached the rules through contributing to multiple ISAs. If a total ISA limit were imposed, providers and HMRC would need to know the total amount held in ISAs at any given time, since this balance could fluctuate over the course of the tax year.

If the cap was across all ISA types as originally proposed, investment returns could take a total balance of £80k held in April up to £100k in March the following year. On the date of each subscription, the total balance held across ISAs would need to be known in order to check the subscription would be valid. £20k in April would be ok, perhaps only £10k in September, or £1000 in February. If investments fell in value, perhaps that would open up some capacity to subscribe more. Someone whose ISA pot dips below £100k due to investment losses may wish to buy the dip, and why shouldn't they?

If the cap only applied to the cash component, then interest earned over the course of the tax year would be relevant when the balance approaches the limit, as would withdrawals from a different ISA (since there would be a limit for subscriptions and another limit for balance). Flexible withdrawals would add some complexity - in that they might breach the limit if later replaced within the tax year. For the first time, an ISA transfer from S&S to cash might result in an ISA limit breach, which would be messy to unpick. Like the current poorly policed annual allowance, HMRC would be left with the burden of dealing with an additional series of breaches that result from the use of multiple ISAs.

Any additional tax revenue raised from the changes could quickly be eaten away by this additional burden. A real time reporting system has already been proposed by HMRC to reduce its existing workload policing breaches, although it will take years, it would pave the way for a much less costly way of imposing such additional constraints.

MeteredOut

Ultrasonic said:

MeteredOut said:

Ultrasonic said:

intalex said:

On the other hand, capping the principal would be impractical (virtually impossible) to implement, not just the initial ordeal of bringing everyone's total cash ISA balances down to under that cap, but also to track whether anyone exceeds the cap (e.g. simply by interest paid into the ISA).

That last part could surely trivially be managed by not allowing interest to be paid into the ISA itself?

No, we cannot assume that would be trivial. If the ISA provider does not provide a "pay away" facility (ie, pay interest into another account), then we cannot assume they could implement that by the start of the next tax year.

Well, it could simply become a requirement, with those not being able to or choosing not to sort this in time not being able to offer ISA products.

Agreed. I was simply pointing out that not allowing interest to be paid into the ISA (therefore requiring it to be paid away) was not necessarily a trivial change for some banks to implement.

otherwayup

dunstonh said:
... Cash ISAs don't aid the economy ...

Surely the cash given to the Cash ISA provider is ultimately invested (at their risk) to provide the interest return.  At the end of the day, someone's investing/speculating/doing business.

masonic

otherwayup said:

dunstonh said:
... Cash ISAs don't aid the economy ...

Surely the cash given to the Cash ISA provider is ultimately invested (at their risk) to provide the interest return.  At the end of the day, someone's investing/speculating/doing business.

The money is lent to borrowers. Some of those may be businesses. So not entirely without benefit to the economy. An argument could be made that those of us investing, and mainly investing in companies listed in other countries, aren't doing much for our economy either.