Today, the economy is in a very different situation, with organisations such as Save our Savers arguing that there is clear bias against savers in this government's economic policies. Pension savers already face a drop in the lifetime pension allowance from £1.5m to £1.25m in April next year. Now rumours are circulating that Isas might be the next in line for a lifetime cap.
According to a report in the Telegraph, Treasury officials have been exploring the impact of a £100,000 cap on Isa savings, worried by reports of Isa millionaires.
The Liberal Democrats have already said that they want a £15,000 total limit on Isa holdings. This is based on research from the Social Market Foundation, a cross-party think tank, that calculated a £15,000 Isa cap would save the government £1 billion a year.
I can see the superficial attraction of a cap, considering that just 2 per cent of the population have more than £100,000 in an Isa. However, none of the government thinking around pensions or stocks and shares Isas has taken into account that the underlying asset allocation and investment performance is the most important aspect of investing. Putting an arbitrary cap on the amount that can be saved during a lifetime in a tax-efficient wrapper will penalise investors who make good decisions and invest time in educating themselves about investing.
For example, investors who can use the full Isa allowance for 2013-14 of £11,520 and continue to invest this amount every year (divided into 12 equal monthly payments of £960) for 30 years would put away £345,600 in contributions. If their investment grew on an average by 6 per cent a year after fees, they would build a lump sum of £935,532 (according to the Investors Chronicle's calculator). But if their investments grew by 4 per cent a year then they would have £657,859.
Any cap that is introduced must be a limit on contributions in, not an end limit on the total sum that can be held in an Isa - the latter would be simply a tax on compound interest and wise investment decisions.
But there is also the big issue of principle - whether retrospective changes to the system of tax allowances are in themselves ethical. I say that they are not.
Millions of people have accumulated more than £100,000 in Isas over the past 15 years (including this IC reader) in good faith on the explicit promise from the state that they would be free of tax. That's why people put money into them. If Isas hadn't existed, investors might have put the money into a pension or a venture capital trust.
So any debate should be about whether for savers starting now, Isas should be capped. This is fine because investors can adjust their behaviour and alter their decisions to take account of any changes.
If there has to be a lifetime cap - it should be on a combined pension and Isa allowance. Many investors have refused to put money away into pensions over the years because of the lack of income flexibility in retirement. These will have maxed out their Isas instead.
But if there is to be any tinkering with Isa limits, investors need more flexibility in compensation. How about introducing the ability to use some of the previous year's Isa allowance if not used and the ability to switch from stocks and shares to cash (currently you can only go the other way).
