The UK ISA as a model for an Irish product?

Brendan Burgess

Brendan Burgess

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Summary of the UK's ISA

  • Save or invest up to £20,000 a year
  • Equities or cash
  • It's a use it or lose it allowance - unused investments can't be carried over
  • Once you take it out, you can't put it back in again.
  • Variations - to save for a house or to allow peer to peer lending
I don't think that this is a good model for an Irish ISA

  1. Way too generous at £20,000 a year
  2. Too inflexible - if you don't have £20,000 this year, but have £40,000 next year, you can't put in £40,000 next year
 
The £20,000 annual limit is very generous. It was much lower for many years.

One major advantage such a generous limit has is in financial planning for those hoping to retire early; before they can access their state and/or personal pension.

In fact, a proportion of people actually use ISA's in lieu of a personal pension because many in their twenties or thirties are reluctant to lock money away until they're 57, soon rising to 58. Effectively, it's a choice between using a pension for tax free growth and paying tax later or using an ISA for tax free growth and paying tax now, before contributing.

Many others see their personal pension growing faster than expected and, as they approach their 50's, divert new contributions to an ISA because they'll already have more money than they can imagine spending when access to their personal pension becomes available.

Great flexibility but probably overgenerous from a tax perspective.
 
ronaldo said:
In fact, a proportion of people actually use ISA's in lieu of a personal pension because many in their twenties or thirties are reluctant to lock money away until they're 57, soon rising to 58. Effectively, it's a choice between using a pension for tax free growth and paying tax later or using an ISA for tax free growth and paying tax now, before contributing
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Lifetime ISAs offer tax advantages and government top-up.
www.gov.uk

Lifetime ISA

Tax free saving for your first home and later life: what is a LISA, who can apply, 25% government bonus, withdrawal charges.
www.gov.uk www.gov.uk
 
ronaldo said:
a proportion of people actually use ISA's in lieu of a personal pension because many in their twenties or thirties are reluctant to lock money away until they're 57,
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This is something I had considered putting in my draft submission.

That the priority for long-term savings should be through a pension fund. If the scheme is too generous, people may opt for it instead.

Certainly, I would advise a young person to build up substantial liquidity in a tax-free account and then start on their pensions.

Come to think of it, I generally advise people to pay down their mortgage, but contributing to a tax-free account might be a better idea.
 
Brendan Burgess said:
Way too generous at £20,000 a year
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Why Specifically? Prima facia it seems high but that is first order thinking in my view.

The history of the allowance is that it has gone through several iterations (e.g. inflation linking at one point - we think that's fair for income tax bands don't we?) but historically the UK had generous investment allowances for dividends/capital gains. These have been reduced over the years along with a corresponding increase in the ISA allowance. The State has favoured income taxes (reducing dividend allowances) over capital taxes (ISAs). The environment is investor friendly. The State has rebalanced its incentives and come down on one side of the fence but "tax break" in totality (for incentivising productive investment/individual financial resilience etc.) is not inherently too high.

(All of the following numbers are from Gemini and I have not verified them).

The total tax forgone by the UK treasury is £9.65bn, for the ISA scheme (note this is a rough figure and is subject to market and interest rate risk in any given year).
1.8% of the £530bn Income Taxes collected, 47% of the total CGT take (£20bn) and 0.78% of Total UK Gov receipts £1.23 trillion.
All for 2025/26.

Secondly, while a lower allowance may achieve the goal improving individual financial resilience, it fails at it's primary objective, releasing money into the productive economy. And like income tax payers - you need facilitate the higher earners, meaningfully, in order to actually move the needle.

[AI] The average ISA contribution is £6866 while the median contribution is not explicitly reported as a single figure by HM Revenue & Customs (HMRC), but data shows that more than 40% of subscribers contribute less than £2,500 annually, suggesting the median is likely within or near that lower bracket.

Key Contribution Trends
  • High Earners vs. Low Earners: Contribution size correlates heavily with income. Approximately 60% of those earning over £150,000 contribute the maximum £20,000, compared to only a small fraction of lower earners.
  • The "Max-Out" Group: Around 2.5 million people (out of roughly 15 million active subscribers) utilized their full £20,000 allowance in the 2022/2023 tax year.
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The volume of actual cash released into the economy is highly skewed i.e. dependent on high earners participating in the scheme.

Brendan Burgess said:
  • It's a use it or lose it allowance - unused investments can't be carried over
  • Once you take it out, you can't put it back in again.
Click to expand...

Simplicity from a public administration point of view I would argue.
 
This system seems like the way to go to optimize for simplicity.

As raised in one of the other threads, it is important that it is low cost to use.

Ideally, you could just create a stock account somewhere and then designate that one account as your ISA.

Less ideal, but still reasonable, would be that it is easy for low cost brokers to support the service. All they need to do is enforce a deposit limit of X per year. Anything over that goes into the normal / main account, or is just kept as cash.

Worse would be it is difficult to setup for providers, so there is a low number of providers. Brokers may end up having a large annual fee to manage the complexity.

A weakness of this system is that it means normal investing isn't simplified.
 
Itchy said:
Why Specifically? Prima facia it seems high but that is first order thinking in my view.
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I don't think that wealthy individuals should be able to put away £200k + tax-free returns every 10 years.

Didn't someone refer to the number of ISA millionaires?

That is not the objective of the Minister.

But that is a political judgement. You might think it's about right and many TDs would not support any tax-free amount. I suspect it will be somewhere in between 0 and £20,000.
 
Brendan Burgess said:
Variations - to save for a house or to allow peer to peer lending
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You say this is by reference to the LISA.
Just for clarity LISA is our original SSIA on steroids. Not only do you get 25% top-up you have totally tax free investment income.
But there are restrictions.
You must be under 40 to invest in a LISA and if you encash before age 60 there is no top-up bonus.
The exception is buying a first home. Now I thought this one would appeal to you as it is exactly what you were promoting for AE or indeed any tax subsidized pension product.
However there are lots of catches. First time buyer. House must be less than £450k. Must be taken out with a mortgage and bizarre rules about not having the mortgage from a connected party (not sure about your reference to peer to peer lending)
For avoidance of doubt, LISA is too niche to be included in any AAM submission.
 
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