‘I’m an investment expert for a banking app – here’s my big problem with the British ISA’ | Personal Finance | Finance

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Plans for a intended to promote investment in UK firms may not be suitable for the current market, an expert has warned.

Rajan Lakhani, personal finance expert at Plum, said a key issue with the savings product is the fact it would be limited to investments in UK companies.

He told : “When you look at the performance of the UK market, any excitement about this proposition starts to fade.

“The performance of both the FTSE100 and FSTE250 have severely lagged the performance of the S&P500 over the last 10 years, with the US market delivering returns three times higher than the UK.

“Here at Plum, we’ve found our investors tend to be international in scope, and look far more to the US for their investment.

“Our two most popular funds are US-listed Tech and US Total Market. Although they have the option to invest more locally, in reality they tend to invest where they see a stronger likelihood of a good return.”

He also warned the idea of encouraging savers to invest in just one country or sector jars with the principle of having a free market.

He said: “Signposting one particular market to investors raises some questions. With the UK market performing less well than the US, consumer duty could come into play too. As this change adds further complexity to ISAs, it raises more issues in that space as well.”

Mr Lakhani also raised concerns the extra £5,000 allowance for the British ISA may not be used by many ISA savers, with only top earners having the extra cash to put in the account.

He warned: “This is effectively a tax break for higher earners or those with high value assets.

“And the amount of money unlocked for UK equities from these changes is predicted to be relatively small; approximately £4billion compared to a market size of £2trillion.”

He said there could also be issues with defining what is classed as UK equity eligible for the Lifetime ISA, as it may include companies with only limited activities in Britain.

Rachael Griffin, tax and financial planning expert at Quilter, warned that with the implementation of the policy delayed until after the General Election, a future Labour Government could scrap the idea altogether.

She said: “We are still at consultation phase but some the issues that might arise are what happens at the point of divestment and the implications of investing in other areas after the initial investment.

“There are already existing challenges round non-qualifying investments in the ISA regime and this could become harder.”

Turning to ISA policy more generally, she said there are some things the Government could do to simplify the system and make it easier for savers to use.

She said: “Reducing the number of ISAs available rather than adding more in the mix would help simplify the whole regime.

“Renaming the LISA as a first home account for example so that its uses are better communicated would streamline the number of ISAs available.

“Similarly, rolling together cash and stocks and shares ISAs so savers can have both types of asset within one wrapper would also be beneficial. Ultimately getting back to ISAs roots would help consumers navigate what has become a confusing landscape.”

Mr Lakhani said there is potential the British ISA could become a successful policy and tha it could “boost confidence in the country’s financial services sector”.

He commented: “UK markets have seen significant outflows from domestic buyers, especially following the changes to pension companies’ capital requirements.

“So anything that can help boost the local market is appealing, in theory. What’s more, getting local retail investors to support the British market is not an old one.

“The forerunner to ISAs, called personal equity plans, had a 50 percent UK threshold when Chancellor Nigel Lawson introduced them in 1986.

“And the likes of France, Italy, Japan and the USA already offer incentives to local investors to invest in domestic assets.”

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