Do you remember how confusing it all was when we had PEPs and TESSAs, maxi-ISAs and mini-ISAs, Child Trust Funds?
I'm sure many of us breathed sighs of relief when ISAs were simplified, but there are still many ways in which they could be improved.
I can't buy what shares?
For one thing, do you know what shares you can select within an ISA? It's shares on the main London Stock Exchange lists, plus those on a number of recognised worldwide exchanges, like NYSE or NASDAQ in the US.
But you can't put shares listed on the Alternative Investment Market (AIM) in your ISA, even though it is controlled by the London Stock Exchange. Well, actually, you can hold some AIM shares in an ISA, providing they also have a listing on a recognised overseas exchange too. Is there any wonder that sometimes even the ISA providers are unsure about what's eligible?
Why exclude AIM? Ostensibly it's because of AIM's less rigorous regulatory regime, which is thought to be riskier. But there are huge solid companies on AIM, like the £1.4bn ASOS, the £950m Rockhopper Exploration and Young & Co's Brewery valued at £300m.
And at the same time, there are high risk tiddlers at the bottom end of the FTSE All-Share worth £1m or less. It really doesn't stand up to rational scrutiny.
Cash is simple, yes?
No, not really. Straightforward cash can be included in an ISA, but there's a range of other things too. There are some National Savings products, for example, that are designed to be held in ISAs -- but there are other National Savings products that aren't, and you can't hold those.
And there are some life insurance policies that can be held in a cash ISA. But wait, I hear you ask, don't life insurance products qualify for a shares ISA? Well, some do, but of those that don't, some will qualify for a cash ISA. Simple? Nope!
Suppose you're getting nearer retirement and you want to start converting your share holdings into safer cash? Tough, you can't transfer a share ISA to a cash ISA. Although those young enough to have a Junior ISA can.
A shares ISA will have cash sitting in it from time to time, and you'll get interest on that cash too, so is that tax-free? Not if you're an adult with a full strength ISA -- but for owners of Junior ISAs it is. But Junior ISA holders can't withdraw cash until they reach 18, while owners of adult ISAs can. Consistency? Not here!
What if you already hold some shares that you'd like to put into an ISA? You can't transfer them, so you'd have to sell them, then put the cash in your shares ISA, and then buy them again. You'd suffer two sets of broker's fees, one stamp duty payment, and you'd lose out on the spread.
How to make it better
It really should not be this complicated. Here's what I'd like to see...
The plethora of different investment products with their different approval criteria needs to be greatly simplified. It makes no sense to prohibit AIM shares, so those should be included. And why on earth are the qualifying criteria for insurance products spread across both types of ISA?
I see no good reason why investments can't be transferred into, out of, and between ISAs -- whether it's selling shares for cash, using cash to buy insurance, or whatever.
In fact, I reckon the simplest way to achieve that would be to have just one kind of ISA, in which you can hold whatever qualifying investments you like. And the qualifying criteria should be simplified too -- how about anything that's regulated by an approved body like the FSA?
And while we're at it, let's get Junior ISAs sorted. Currently, if you were born during the Child Trust Fund years, you're stuck with one of those and you can't have a Junior ISA. The government has been making noises about merging the two, and I reckon we need some action -- CTFs should be abandoned, and existing ones converted to Junior ISAs. And holders should be allowed to withdraw money from their Junior ISAs too, as that would encourage them to put any spare cash they have into them, maximising the potential amount they could save tax on when they get older.
What do you reckon? Do you agree that a simple concept has become way too complicated? Please do share your thoughts.