Chancellor Rachel Reeves is considering halving the amount that Britons can save in cash ISAs to £10,000 in the upcoming November Budget, according to a report by the Financial Times.
The move, which was previously discussed earlier this year around the Spring Statement, is now back on the table, splitting industry experts.
Love them or hate them, cash ISAs are a popular scheme that pairs with the Stocks and Shares ISA, giving investors a yearly £20,000 tax-free allowance to allocate to either cash or investments in any proportion.
Today, there is around £300bn worth of cash sitting in these tax-free accounts, which Reeves is hoping to redirect towards the languishing domestic market.
Rob Morgan, chief investment analyst at Charles Stanley, said the scheme is “essential for building short-term financial resilience through an emergency fund and saving for shorter-term goals”, but agreed with the chancellor’s views that too many people in the UK hold too much cash and not enough in investments.
This has negative ramifications for the success of the UK stock market and the wider economy, but is also detrimental to the savers themselves, as cash savings are “a missed opportunity to drive long-term wealth creation”.
“Today, savers are benefiting from high headline returns compared with a few years back, but they shouldn’t ignore the basic principle that keeping too much in cash can be counterproductive in the longer run,” he said.
“Directing more money into stocks & shares ISAs could also be an opportunity to revive interest in the UK stock market, which is suffering from a lack of investor interest and a dearth of IPOs [initial public offerings].”
But not everyone agrees that a lower cash allowance would translate immediately into money flowing into UK investments. In fact, AJ Bell consumer research showed that only one-fifth of cash ISA holders would invest in the stock market if the cash ISA allowance was cut.
Tom Selby, director of public policy at the firm, has been campaigning for an overhaul of complexity and a simplification of the ISA market.
"The chancellor is absolutely right to challenge the status quo on ISAs. Any reforms pursued at the Budget should focus on making it as easy as possible for those with excess cash to invest for the long-term,” he said.
“Simplifying ISAs by combining the cash and investment versions into a single product is the obvious long-term answer, making the system simpler to navigate and removing barriers between saving and investing.”
An alternative “straightforward and low-cost option” would be to scrap stamp duty on UK stocks bought within ISAs, which would favour retail investors and listed companies alike.
But Michael Healy, UK managing director at trading platform IG, said cash ISAs are “a pernicious product” that has “steadily eroded people’s wealth” and is “completely incompatible” with long-term wealth creation.
“The chancellor is absolutely right to take aim at this outdated product, but she should go further by abolishing the cash ISA allowance altogether,” he said.
“Britain needs more people investing and more money directed towards growth, and abolishing the cash ISA is a sensible place to start.”
Speaking with Trustnet earlier this year, Clive Beagles, manager of the JOHCM UK Equity Income fund, said cash ISAs have degenerated since their introduction.
They were set up for people to invest in individual equities rather than their current purpose, as people are “sticking tens of millions of pounds into ISAs to earn an interest of 4% tax-free”.
“That is not what they were intended for when they were set up but they have morphed into something different,” said the manager. “In that regard it is perfectly logical and fair to think about whether that is the right structure and whether it is something that can be reassessed.”
If the measure came into effect, Morgan suggested other ways in which cautious investors can achieve cash-like returns. These would require some level of knowledge, advice or guidance, but “it is a possible workaround for people happy to take a modicum of risk”.
Most taxpayers enjoy a certain level of tax-free interest on their savings outside of ISAs, he noted, with the Personal Savings Allowance (PSA) allowing many people to earn up to £1,000 in interest on cash and certain investments each year.
Basic rate taxpayers can earn £1,000 of interest year before paying tax, while higher rate taxpayers have a lower allowance of £500. Additional rate (45%) taxpayers don’t receive any PSA.
There is also a ‘starting rate’ for savings, which is a special 0% rate of income tax for savings income of up to £5,000 for those with taxable income below £17,570.
“Many lower earners with healthy cash reserves are therefore not necessarily too affected by fresh Cash ISA restrictions,” Morgan noted.
Finally, there is also the possibility of keeping money in premium bonds offered by National Savings & Investments.
“Premium Bonds pay tax-free ‘prizes’ instead of interest, and the returns are literally the luck of the draw. But the more you have in them, up to the limit of £50,000 per person, the more you can expect to get a reasonably consistent cash-like return,” he concluded.