Rachel Reeves, the Shadow Chancellor of the Exchequer, has proposed a significant reduction in the maximum contribution limit for tax-efficient cash individual savings accounts (ISAs). The House’s suggested amendment would raise the current threshold from £20,000 to £12,000 annually. The initial details of this story were reported by the Financial Times. This marks a significant strategic shift aimed at fostering greater levels of retail investing in the UK.
What Reeves hopes to create is a retail investing culture comparable to that in the United States. She aims to strike a balance between the amounts individuals can contribute to cash ISAs and stocks and shares ISAs. For one, finance experts are concerned that cutting the cash ISA limit won’t spur the desired increase in investment. Instead, they worry that it might make a mess of the current system, particularly in terms of ISA transfers.
Quite a few financial industry big wigs are understandably concerned that this reduction threatens to destroy the brand of cash ISAs. A new poll by Yorkshire Building Society shows just how big a problem this is becoming. Almost half of current cash ISA holders (45 per cent) report that a cut in their allowance would do them serious damage. This sentiment is indicative of wider fears regarding how these changes would impact savings behavior across the UK.
Nationwide Building Society has issued warnings that cutting tax breaks on cash ISAs could lead to reduced mortgage availability for first-time buyers. Craig Fish of Nationwide demonstrated the effect this has had on lower cash ISA contributions. He cautioned that this trend would result in the diminishing of lenders’ pools of savings. To do that, he continued, “Slash cash ISA allowances and you stop filling the very savings pots these lenders rely on. Less money in means less money out, and that can only lead one way: tighter lending and potentially higher rates.”
Finance experts warn that the changes being proposed would discourage consumers from saving, and investing at all. Rachael Griffin pointed out that while some may expect a shift towards stocks and shares ISAs, the reality is likely different: “If a cap does come in, it is unlikely to send money rushing into stocks and shares ISAs. Rather, we might just see more of it flooding into premium bonds or other safe havens.”
Reeves’s plan has already been criticized for not going far enough to tackle the cash savings by focusing on cash savings’ more troubling behavioral undercurrents. Greg Davies, head of behavioural finance at Centtrip, warned that the current debate around limiting net cash ISA allowances misses some key shortcomings in these products. He remarked, “Recent speculation about restricting cash ISA allowances misses a more fundamental problem: that these products are behaviourally flawed to begin with.”
The financial community’s apprehensions are compounded by the average investor’s tendency to lose 2-3% annually due to excessive cash holdings. To counteract this effect Griffin described this phenomenon. Further, he explained, “This isn’t a knowledge problem, it’s an emotional unwillingness to leave behind what’s comfortable and safe and go to what’s right.”
FCA chief Robin Fieth said he was very disappointed by Reeves’s proposal. He argued that reducing the threshold to £12,000 would introduce needless complexity and risks undermining the integrity of the ISA brand. He continued, “It is particularly disappointing that the cash ISA subscription limit is to be reduced. This could discourage Americans from saving and investing.”
Local Paonia rancher Tim Bowen shared similar concerns. He contended that such a shift would threaten UK savers and risk every other building society’s existence.