After 18 months of focusing on how best to protect the nation’s health and wealth, it’s now full steam ahead (green steam of course) as the government seeks to turbo-boost the UK’s economic recovery.
One approach is to encourage greater investment, including by getting individuals to invest some of their reported billions of excess cash languishing in next to zero cash savings.
As we approach the Autumn Budget, we hope Rishi Sunak recognises the benefits of encouraging greater investment and resists cutting back on the likes of pension contribution allowances. Instead, why not encourage more investment and surprise us with a “rabbit out the hat” doubling of the ISA allowance?
This could take the form of a separate “Build back better” stocks and shares ISA with its own £20,000 limit. This would provide an extra incentive for individuals to make the most of cash savings by investing it, with the potential to achieve real growth in an environment of rising inflation. By doing so, they can contribute personally to economic recovery.
While introducing this new form of ISA would take time, compared to some Budget speculation changes, it’s more achievable in the shorter term. And for those who need support, the Financial Conduct Authority will be consulting next year on a guided sales process around moving from cash to stocks and shares ISAs.
But would this be sufficiently targeted towards supporting UK economic growth? Might the chancellor want to target UK investments? In a world of global corporations, defining what qualifies as “UK” would be challenging.
On the eve of COP26, with an ever-greater focus on ESG, supporting climate change and achieving net zero targets, could the “Build back better” ISA have a specific ESG focus?
The government is also pushing institutions such as defined contribution pension schemes to invest more of their default funds in longer term illiquid “productive finance” such as infrastructure and start-up companies, perhaps through Long Term Asset Funds. There are many challenges to overcome here as the Productive Finance Working Group has highlighted. Long Term Asset Funds will have notice periods, but pension scheme members expect daily dealing, creating pricing challenges and liquidity management issues, all of which will need detailed stress testing.
But if these are resolved, and if illiquids truly do deliver better returns, could there be an extension to individual retail investments within “Build back better” ISA wrappers? There would need to be safeguards including diversification and some form of advice.
Each of these “refinements” adds layers of additional complexity and couldn’t be introduced without proper thought and industry consultation. There are doubtless many risks alongside any benefits. But in the meantime, Rishi, how about it – doubling the ISA limit from next April would make some positive headlines.
Steven Cameron is pensions director at Aegon
A “build back better ISA”? Can’t we just have a patriotic song instead, like “We’re Backing Britain” in the 1960s?
On the one hand Steven suggests it could be invested in UK-only shares and then on the other he suggests it could be invested in ESG shares, which is a total contradiction. ESG shares are disproportionately ex-UK because the UK stockmarket has so many companies involved in dubious activities like fossil fuels, gambling, tobacco, armaments, and the Daily Mail.
And we have the Government’s current hobby horse about getting ordinary people to invest in illiquid toxic junk to prop up the Government finances for good measure.
If the ISA allowance gets increased it will be because Rishi has slashed pension allowances or abolished higher rate relief, so be careful what you wish for.
As noted, defining just what constitutes a UK company is difficult. Many international companies are listed on the UK stock exchange but don’t retain their profits here.
The waters of ESG funds are still very murky and such funds have yet to establish clear track records which are likely to make them attractive to prospective investors. Despite all the warnings that past performance is no guide to what the future may hold, track records count.
Anecdotally, many who’ve invested in ESG funds are already asking: When are they going to start delivering the goods? I don’t mind doing my bit to help save the planet, but I also want decent returns on what I invest.
As for Long Term Illiquid investments, I really don’t anticipate any much investor appetite for those and, again, they have to be able to demonstrate a competitive performance advantage. Despite everything that advisers are at pains to point out to clients about the need to take a long term approach and accept the near certainty of periodic and sometimes sustained downturns, the fact remains that most still want and, indeed, often EXPECT short term gratification.
For their part, many advisers pander to this by fiddling about with portfolios instead of properly considering the fundamental causes of a sticky patch and advising their clients to batten down the hatches and wait for the storm to pass.
Given that one of the major attractions of ISA investments is ready access to them, illiquidity will always be a significant deterrent that only tax incentives (beyond exemption from CGT) are likely to moderate.
Thanks Sascha. Agree UK-only problematic. ESG maybe a more likely focus and yes, can’t then be UK based. Really hope pension annual allowance remains untouched – other than to increase Money Purchase Annual Allowance from £4k.
To be fair there’s no reason you couldn’t have an I’m Backing Britain ISA which only invests in ESG-filtered UK shares.
But when it gets that specific the Government would essentially be acting as a fund manager, which means it has to take the flak from the public if the Government’s selected shares do badly.
Julian – thanks for these comments. I agree it’s easy to say I want to go green until you feel you may have lost returns as a result (I know – one doesn’t follow the other!) Advisers will have a challenging time once they are required to factor client attitude to sustainability in their advice.