Chancellor Rachel Reeves has confirmed she is considering “changes” to cash ISAs despite concerns raised the proposals would likely hit older savers with modest balances the hardest. The average cash ISA holder hails from a low to middle-income bracket, relying on conventional savings methods as they approach or manage retirement funds.
The popular tax-free savings accounts allows savers to currently put in up to £20,000 a year. The Chancellor was reportedly considering reducing the annual limit for cash ISAs to as low as £5,000 or £4,000 a year, in a bid to encourage people to put money into stocks and shares instead.
Ms Reeves is understood to have backed down from this immediate plan but in a speech on Tuesday (July 15) she said she will “continue to consider further changes to ISAs”.
Victor Trokoudes, co-founder and CEO of Plum, an online savings firm, shared his views with City A.M: “While I share the government’s desire to encourage people to invest over the long term to make their money work harder for them, plans to cut cash ISAs aren’t the best way to address this. Firstly, cash ISAs are often used for short-term savings goals where people don’t want to take risks like emergency funds or house deposits, or to protect savings from tax, not long-term financial gain.
“Secondly, it’s not clear whether the reforms will get more people to invest. Our research has found that, if cash ISA limits are cut, savers won’t simply funnel their hard-earned cash into investments to secure tax-free returns instead.
“In fact, the most popular alternative option is to hold this money in a cash savings account, followed by a current account, rather than investing. And even for those who do turn to investing with the ambition to secure higher returns, there is no guarantee that they would put their money into British companies, as Rachel Reeves is hoping.”, reports Yorkshire Live.
Charles Hall, head of research at city investment bank Peel Hunt, remarked: “ISAs receive over £9 billion in tax benefits per annum, which is sizeable in the context of the government’s need to meet its fiscal rules. As such, we should be questioning the value of this tax benefit to both individuals and the country. Does it really make sense to incentivise people to keep their money in cash?
“Note this is not rainy day money, this is £20,000 per annum of savings. A limit of £5,000 on the cash ISA would ensure that people can still save for a rainy day and would encourage investment into higher returning assets.
“Surely it is far better to encourage investment in shares, which over any meaningful time period materially outperforms the returns on cash. The issue in the UK is not that we save too little in cash, it is that, at over £2 trillion, we save far too much, which means that there is a lack of investment in growth assets.
“At the same time we should review the Stocks and Shares ISA. Does it make any sense to give tax incentives to investors to fund the growth of overseas companies? The narrative is often posed that we don’t have great companies to invest in, but we do have global leaders in sectors such as healthcare, energy, banking and defence as well as having funds that give exposure to a broad spread of companies and assets.
“We also have a host of technology companies looking to float in the UK, which will transform the perception of the London market. Of course, investors can still access investment overseas, but just without a tax incentive. The Chancellor has a compelling opportunity to help savers generate better returns and accelerate economic growth through changing the focus of ISAs.”
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