Paper – A £10bn short in the arm for UK equities?

This short paper outlines how the UK could unlock an extra £10bn a year of investment into UK equities by reforming the ISA regime to require half of all new investments to be invested in UK equities, and raising the ISA allowance to £25,000 in line with inflation. This would help rebuild a pool of ‘natural buyers’ for UK equities, drive a renewed culture of investment and increase retail participation, and help crowd-in additional investment.

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Most of the debate over the past few years on the decline in in UK capital markets and in long-term investment has focused on how the £5 trillion pensions and insurance industry can invest more in productive assets like UK equities, growth companies, and infrastructure. While the reforms to pensions that are already underway are welcome, the problem is that pensions reform is really difficult: it is highly technical, politically challenging, and slow. The benefits of the reforms underway – which are expected to be fleshed out at the Autumn Statement next week – could take years to come through, and even then, the impact on UK equities would be limited.

We think a quicker and easier route could be through ISAs (Individual Savings Accounts), an often overlooked but huge pool of long-term capital: there is more than £460bn invested in stocks and shares ISAs with annual subscriptions of around £35bn. This paper outlines how an extra £10bn a year could be channelled into UK equities by tapping into these annual flows. This additional potential investment is roughly the same as annual flows from pension contributions into UK equities today (of about £9bn) and would represent a significant shot in the arm for the UK stock market.

Here’s how the proposal could work:

>>> Set a threshold of 50% for all new subscriptions to ISAs in future to be invested in UK equities.

>>> Increase the current annual ISA limit from £20,000 (which is unchanged since 2017/18) to £25,000 in line with inflation.

>>> Abolish junior cash ISAs and fold them into junior stocks & shares ISAs.

>>> Simplify the complex ISA framework (there are six different types of ISA) and launch an information campaign to encourage 10% of the annual £31bn of subscriptions into cash ISAs to be invested in stocks and shares ISAs instead.

This paper summarises the problem we are trying to solve; outlines how ISAs could be a better option for boosting investment in UK equities than the current reforms to pensions; and explores the options and limitations of some existing proposals to reform ISAs. It also poses and addresses the most likely pushback to this proposal. We have been at the forefront of this debate for the past few years with recent reports and events on unlocking the capital in capital markets, the parallel crisis in UK pensions and capital markets, and widening retail participation in equity markets.

This is not a fully formed policy paper. The data around pensions and ISAs is often patchy and we have had to make some quite big assumptions (some of them no doubt wrong). The main aim of this paper is to stimulate debate about how to unlock more investment from the huge pool of long-term capital in the UK, help kickstart a recovery in UK capital markets, and help boost the UK’s long-term growth, productivity, and prosperity.