Despite intense media speculation, coupled with some influential financial voices calling for reform, it was ‘as you were’ on ISAs from Chancellor Rachel Reeves in her Spring Statement – but that doesn’t mean that the system will be left alone. Expect those siren voices for change to become even louder as we approach the proper Budget in the autumn.
Documents have revealed that the Treasury is still considering capping the amount which can be invested in a cash ISA, within an individual’s annual £20,000 allowance.
The reasoning behind this is the need to encourage savers to invest in British companies rather than holding large amounts in cash. There is some political consensus here: the last Conservative Chancellor Jeremy Hunt suggested a ‘British ISA’, perhaps as a top-up to that £20,000 limit, although such a move was seen as unwieldy and unlikely to succeed.
When ISAs were introduced in 1999, there was a £3,000 cap on cash investment, within the then overall annual limit of £7,000. It was George Osborne who merged the allowances in 2015, giving savers the freedom to allocate their investments as they wished.
But it seems that Mrs Reeves is indeed keen to encourage us all to invest our savings in UK businesses, and some paring back of the freedom to put your entire annual allowance into a cash ISA seems inevitable.
However attractive this theory might seem, there are some real problems in achieving this. The first is practicality: how do you ensure that money is indeed being invested into British firms? You can’t simply insist that investment is made in FTSE companies, as many of these are neither genuinely British nor operating wholly or even mainly in the British economy.
Enforcing a ‘British only’ policy would probably mean creating special funds for that purpose, restricting the range of stocks and shares available for people investing via an ISA wrapper - the argument being that UK tax reliefs should really only benefit British-listed companies.
Another big issue is that banks and building societies use the money invested in cash ISAs to fund mortgage lending. Turn off that tap, and the danger is that mortgages become more expensive, hardly a move designed to make the property market accessible to new entrants.
On top of that, many of those holding cash ISAs do so because they are attracted by their inherent flexibility. Unlike stock and shares ISAs, which should be viewed as long-term investments, cash can be accessed easily and is not subject to short-term volatility in the market. The many people who hold their emergency/contingency funds in cash ISAs are unlikely to be attracted by investing in the stock market.
The thinktank New Financial has suggested that limiting cash investment to half of the current £20,000 would be a good compromise solution. This would leave most savers unaffected, given that three in four cash ISA allocations are below £10,000. The thinktank calculates that this approach would bring a not insubstantial £10 billion extra into the stock market each year.
The Chancellor must be careful that in bringing in reform she doesn’t simply turn people off ISAs altogether – given how successful they have been in getting British people to save, that could be very damaging indeed.
However, it does seem likely that some form of restrictions on the amount that can be invested into cash ISAs is on the way. For those determined to maximise their cash ISA holdings, using the new allowances which were created when we ticked over into the current tax year is more important than ever.