Labour should argue for an ISA cap

The ISA is a tax break for the prosperous/rich right now, but with the loss to a future chancellor in 20 or 30 years time.

Ed Balls ncj

The ISA is a tax break for the prosperous/rich right now, but with the loss to a future chancellor in 20 or 30 years time, argues Dan McCurry

The investment community were expecting an ISA cap as the main feature of George Osborne’s budget, so they were as surprised as everyone else by the annuity policy.

The budget was greeted with good cheer. Not only did the cap not happen, but the annual investment limit had been raised to a whopping £15k, without the Labour party seeming to notice. What a coup!

So let’s just see how the ISA breaks down. Let’s imagine a baby called Gideon junior comes into this world to a wealthy family, who immediately open a junior ISA, and deposit the maximum £4k per year until he is 16. He then gets an inheritance and he deposits the maximum £15k per year until he reaches the retirement age of 68. How much tax free wealth will he have by that time?

Financial advisers calculate future returns as being either 3 per cent, 6 per cent, or 9 per cent, depending on how optimistic the client is, of future returns, or interest rates. Using the 6 per cent figure, Gideon junior would have £107,458 by the time he reaches 16. With £15k a year added, at 6 per cent compound interest, by the time he is of retirement age of 68, his ISA would have grown to £7,811,662.

It made sense for the City to expect an ISA cap, since the Labour Party had been speaking about ending the allowance for the upper tax band, so the whole thing was obviously being scrutinised. Osborne was looking to raise revenue, and would want to clip the wings of a potential popular Labour policy, so a cap on the maximum that can be held in an ISA made sense.

However, the City seems to have missed the obvious political angle. Unlike pensions, where the government provides an expensive tax rebate for each contribution, with the ISA it costs the government nothing right now, but they can’t tax the income or capital gains later, when it is withdrawn. It’s a tax break for the prosperous/rich right now, but with the loss to a future chancellor in 20 or 30 years time.

Osborne likes a flutter, and he seems to have gambled that Labour would be so thrown by the annuity reform that they’d completely miss the significance of the increase in the ISA allowance. He may also have calculated that the bingo tax break would so animate the opposition, that they would be completely diverted from the biggest tax cut for the rich that we’ve seen since the Lawson budget of 1988.

The ISA started life in 1986, as the PEP a £6,000 tax exception. Gordon Brown increased this to £10,200, during the prawn cocktail offensive, but this was still within the realms of an ordinary saver, in a good year. The increase to £15k a year puts it in a different league.

The really extraordinary aspect of Osborne’s increase, is not just that it is the largest tax break since 1988, for the lucky few, but that it has been introduced during a period of austerity, while everyone else has been suffering tax increases, and many pensions have been aggressively slashed.

So if Labour were to cap the total amount that can be held in an ISA, then at what amount?

I think we first need to question our reason for providing this tax break at all. I believe Gordon Brown wanted to increase the amount that the country has saved, in order that more investment is available to industry. Is that our thinking, or is it that we want people to have financial security in old age?

If it is a retirement question, then how much income do people need? I’d say that to avoid poverty they’d need an income of £15-20k per year. According to today’s low rates, you would need an annuity of £250k to achieve this. To live with comfort, a person might need £30k per year, which could be a £500k annuity.

These annuity rates are unusually low due to the effect of Quantitative Easing. However, it gives an idea of the kind of figures that policy makers should be considering. In my view, the £500k figure is the one we should be looking at.

24 Responses to “Labour should argue for an ISA cap”

  1. guidofawkes

    Yes, saving for your old age is terrible. Much better to be a burden on future taxpayers yet unborn.

    Seriously?

  2. McCurry

    Guido, Are you saying that we are a burden if we don’t have £7.8m?

  3. guidofawkes

    Idiotic comment.

  4. LeftFooterRightWing

    I earn £30K per year and save into stocks and shares ISA schemes to fund my retirement.

    I do not have a platinum plated public sector pension!!!

    Why does the left wing press continually assert that the only people who have anything to do with ISA’s are wealthy millionaires?

    Get our of your bubble and find out how the real world functions. The ISA and savings proposals in the budget were fantastic for those self sufficient hard working private sector employees who have no desire to live off or take from the state either as an employee or claimant. There are millions of us in this country who provide the funds for the public sector to plunder.

  5. LB

    How about a notional cap on civil service pension assets?

  6. LB

    They are desperate for the cash. Follow the money. They have no assets for their pensions. They spent all the contributions. That leaves the debts still in place.

    http://www.ons.gov.uk/ons/dcp171766_263808.pdf

    5.01 trillion 4 years ago, rising rapidly and the borrowing on top. It’s more than total UK wealth.

    So they look around and see you’ve saved, so they want to help themselves.

  7. Spartacus

    So £10,200 p.a. = not rich but £15,000 = rich. Why is there an ‘acceptable’ amount you can save of personal wealth that’s already been taxed (through income or inheritance in your example). You just aren’t making sense or justifying your argument here. If Gideon went and spent it all on a Lamborghini then you’d scream and shout as well.

  8. McCurry

    They’ve had their pensions slashed by Osborne.

  9. McCurry

    If you are earning £30k, I doubt if you are saving £15k every year. If so you will likely be a millionaire in retirement. I’m not saying ISAs are a bad thing, I’m saying there should be a cap.

  10. McCurry

    It’s not idiotic, its maths.

  11. LB

    Yep. And its just starting.

    You need to ask how much they owe in total, for all the state’s pensions.

    I’ve give you the number for the assets they hold. Zero.

    Given the growth in that off the book debts, they will never pay out in full.

  12. LB

    So put the numbers up.

    How much is owed?
    What asset owned to pay it off? Cash flow or value if sold?

    Then you can do the maths to see whether you are going to be paid or not.

  13. blarg1987

    There is another group of people who would be caught out by such a cap, those would be your first time buyer, who are saving for their own property.

    They are going to look at ways to maximise their savings and make it work for them (rightly), be it tax free savings accounts, or a little more risk such as stocks and shares etc.

    Truth be told their will always be a minority both rich and poor who will try and exploit and take advantage of any system or policy that is brought in.

  14. LB

    And the enabler of this, is the state.

  15. LB

    They want to double, triple dip. Tax on tax on tax.

  16. McCurry

    Saving for a deposit for a house is what its good for. You don’t need £7.8m for that though.

  17. McCurry

    http://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

    16 years at £4000 @ 6% = £107k.
    with £197k as a base, we then have 52 years x £15k again at 6%.
    Enter the numbers and you will get £7.8m.

  18. LB

    Sorry, wires crossed.

    You assume that the 15K stays constant. And your 6% doesn’t take into account inflation.

    How about you doing the same for the state pension? A median wage earner is putting in 18.5% of their salary as NI contributions. 10% is spent on the insurance element.

    So what sum do you get for investing NI for 52 years?

    What income does that generate?

    How does it compare against the state pension?

    Always worth making the comparison to see if the government is good for you.

  19. LB

    Based on a median wage of 26.8K (current value). Start at 18, end at 66, NI invested at 6% gives a fund of 1,327,055.50. At 6% interest that gives an income of 79,623.33 pounds a year.

    The state pension costs 150,000, and pays 5,700 a year.

    That’s why you have poor people.

    The state did them in.

  20. McCurry

    lol

  21. blarg1987

    I agree you do not need 7.8 m for that, but you probabaly find under the age of 18 Childrens accounts pay a higher rate of interest thus more cost effective then ISA’s. When aged 18 ISa’s are probabaly better value.

    Most people wont have the money you talk about they will probabaly max out their cash ISA’s for a couple of years to build their deposit then use that money to purchase a property later in life they will then put money into ISA again.

  22. blarg1987

    Of what exactly?

  23. McCurry

    I agree. But my argument is for a cap on the maximum held in an ISA. Say £500k?

  24. sajem80

    Where on earth can you get 6% interest nowadays or been able to recently?! Perhaps only in a risky stocks and shares ISA relying on dividends, and where you may lose your some or a lot of your money. Also, as others have said, the 6% does not take into account inflation.

    This article has several other simplistic ideas. It is for example naive to imagine that someone that can invest £15,000 in a year is rich. It might be a pensioner who has a lump-sum from a house-sale. It might be 15k for only one year, or just a few anyway. They may never see the capital again, because they need it to keep it in the ISA producing interest to fund the retirement home @ £25k + /year! The idea of someone investing 4k then 15k regularly from birth to 68 is possible in the imagination, but must apply to a handful of people only, if anyone. The main problem is that people do not save enough, or start early enough, as we are always hearing!

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