Will Reeves cash out at the Spring Statement?

A shake up of the Individual Savings Account (ISA) system could be on the cards at next month’s Spring Statement. Government figures have expressed their frustration at the subpar performance of the cash ISA while successive administrations have made it clear they want to see more savers fuelling British business with their nest eggs. Here we look at the cases for and against making changes to the ISA regulations.

Eroded by inflation

Speculation over the future of the cash ISA has been fuelled by recent comments made by the City Minister, Emma Reynolds, to the House of Lords Financial Regulation Committee.

Reynolds complained that a system that meant billions of pounds were in accounts that were safe but producing below inflation returns. Those accounts also benefitting from tax breaks while failing to fund UK investments.

She said: ‘There is a recognition that by seeking to eliminate risk, for example why have we got hundreds of billions of pounds in cash Isas, we have failed to drive an investment culture that we see in other places.

‘We are starting to have a discussion with the regulators and with you and with others about how we can create an investment culture.

‘We’ve regulated so much that we’re not protecting consumers against inflation.’

Tax-free environment

Successive governments, concerned at the relatively low level of savings in the UK economy, have over the years introduced variovarious means by which individuals can save through a tax-free environment.

ISAs are tax-exempt savings accounts available to individuals aged 18 or over who are resident and ordinarily resident in the UK. The overall annual savings limit remains at £20,000 for 2024/25 and 2025/26.

Investors are allowed to invest in a cash ISA, an investment ISA, an Innovative Finance ISA or a combination of the three, subject to not exceeding the overall annual investment limit.

Lobbied hard

The Financial Times recently revealed that Chancellor Rachel Reeves was being lobbied hard to restrict or eliminate the tax break on cash ISAs and instead give clear preference to investments in equities or bonds. This would also align tax incentives with her persistent mantra of economic growth.

The British public has among the lowest levels of equity ownership of Western economies despite efforts to revitalise a culture of investment in recent years.

The previous government aimed to tempt more money into the stock market with the introduction of a Great British ISA. However, the plans were criticised by top savings firms as a ‘gimmick’ and later shelved.

Significant outperformance

The potential rewards of persuading people to switch from cash to equities are significant. Around £740 billion could be unlocked if UK savers were to invest around 15% of their household assets in the market, according to think tank New Financial.

It could also benefit those savers with analysis showing that stocks and shares ISAs have significantly outperformed their cash counterparts since their introduction in 1999.

Andy Briggs of pensions firm Phoenix Group is among those demanding change, saying: ‘The state should not be giving a tax break for us all to park our money in cash.’

Reform options

There are two potential ISA reform options open to the Chancellor. Ms Reeves could reduce the cash limit for cash ISAs to £5,000 or £10,00 and raise the limit for Stock and Shares.

The Chancellor could also examine the possibility of eliminating Stamp Duty or reimbursing it when UK shares are bought via a stocks and shares Isa.

However, the Chancellor has been warned by building societies that the moves would cause mortgage rates to rise and lenders to pull deals.

In a letter, the Building Societies Association said: ‘Cash ISAs form a key part of many people’s savings, whether that is for their emergency buffer, saving towards a dream holiday, or protecting some of their wealth from changes in the stock market.

‘The implication made by many of those calling for curbs on cash ISAs is that the savings are lying idle and not supporting economic growth. But banks, building societies, credit unions and other providers use the deposits to fund loans to households and businesses.’

The Treasury said: ‘We want to help people save for their future goals and build greater financial resilience across the country. We keep all aspects of savings policy under review.’

This Spring