Cap on your ISA? Cut in the amount of tax-free cash you can take from your pension?


iStock_000001293543_ExtraSmallIf reports over the past few days are to be believed, these are just two of the more radical ideas being considered by the Treasury.

The Sunday Telegraph reported at the weekend, that officials from the Treasury have consulted financial services firms on the effects of introducing a cap on the amount of money investors can hold in Individual Savings Accounts (ISAs), as well as the possibility of reducing the tax-free lump sum available from pensions.

Cap on ISAs?

First introduced by the Labour government in 1999, ISAs allow savers and investors to shelter capital from tax. Whilst annual contributions are limited, to £11,520 in the current tax-year of which up to £5,760 can be put into a Cash ISA, the total balance which can be held is unlimited.

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It appears the Government is growing increasingly concerned by the number of ‘ISA millionaires’, sheltering significant sums from the clutches of the taxman.

The Sunday Telegraph reports Treasury officials have sounded our leading industry figures on the effects a cap, possibly as low as £100,000, would have on savers and investors.

The newspaper suggests whilst there are only a handful of ‘ISA millionaires’, the numbers potentially affected by a £100,000 cap, would run into the tens of thousands.

Responding to the story the Treasury said there were no plans to introduce a cap. However, some experts are clearly nervous that even consulting on such a radical idea could signal a worrying change in direction.

Pension tax-free cash to be reduced?

At the same time it was reported officials have also consulted on reducing the tax-free lump sum available from pensions.

Currently, most pensions allow up to 25% of the fund to be taken as a tax-free lump sum, which is often used to meet capital expenditure or invested to provide additional income. The tax-free lump sum can be taken from the age of 55, with the balance of the fund providing an income, which is then subject to tax.

Whilst it isn’t unusual for such stories to appear in the press leading up to the Autumn Statement, due this year on 4th December, and the Budget, some experts have suggested there is an increased chance of change, as the Government looks at evermore radical ways of raising cash.

Indeed the Pension’s Policy Unit has previously suggested a cap of just £36,000 could be introduced. Although in response to the story the Treasury said: “As you would expect, there will be plenty of discussions going on about pensions tax relief, but reducing the lump sum is not within the thinking on those conversations.” (Source: Telegraph)

Constant tinkering

Tinkering with pensions has been a constant theme, gathering momentum since Gordon Brown’s ‘raid’ on pensions in 1997.

It’s undeniable some changes, such as Auto Enrolment, the State Pension triple lock and the flat rate State Pension will have a positive impact on future retirement incomes. However, other changes have caused significant harm to the retirement provisions of many.

Experts are critical of the constant tinkering with pension rules, arguing retrospective changes simply serve to undermine the public’s confidence in the pension system; especially dangerous at a time when millions of workers are set to be automatically enrolled into a work place pension.

Whilst pension tinkering has become the norm, ISAs have been left remarkably unscathed and are central to many people’s retirement and savings strategy. If the Treasury were to introduce a cap on the amount of money which could be held in an ISA, the tinkering disease will have spread to the savings market, which has already been critically wounded by low interest rates and relatively high inflation.

The effects of any such changes would be catastrophic, fatally undermining the public’s confidence in saving and investing, at a time when we should be encouraging everyone to make greater provision for their financial future.