Any cut to cash Isa allowance ‘may not prompt savers to boost their investments’

Savers could end up having less money to put into stocks and shares if the cash Isa limit is cut, a finance expert has said.

The comments follow speculation that plans to cut the annual tax-free cash Isa allowance could be announced in Chancellor Rachel Reeves’s Mansion House speech on July 15.

The Government is looking at options for reforms to Isas to get what it feels is the right balance between cash and equities, to help savers earn better returns, boost the culture of retail investment, and support the push for growth.

The Financial Conduct Authority (FCA) has previously said there are around seven million adults in the UK with £10,000 or more in cash savings who may be missing out on the benefits of investing throughout their lives.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Cash Isas are often a first port of call when people are starting out, and they’ll often gradually move over into investments as they find their feet.

“If the speculation is accurate, it means they’ll have less available to transfer into a stocks and shares Isa – effectively reducing investments rather than boosting them.

“This is an issue which requires a carrot not stick approach.

“We know through extensive research that the barriers to investing are behavioural, so it’s through encouragement and increased confidence that we will all increase the number of retail investors.

“This week’s announcement of radical changes to financial information, through targeted support and changes to the boundary between financial advice and guidance, is a major breakthrough in supporting people to find that confidence to make the first step.”

The FCA set out proposals earlier this week to help more people navigate tricky financial decisions and boost confidence when getting to grips with investments.

The proposals would enable firms to offer a new type of help called “targeted support” and make suggestions to groups of consumers with common characteristics.

Brian Byrnes, head of personal finance at savings provider Moneybox, said: “Over the last two decades since their introduction, Isas have grown to become a much loved and trusted tool by the British public and Isa wrappers have become synonymous with their £20,000 annual limit.

“The current speculation around potential changes to the cash Isa is undoubtedly already causing uncertainty and confusion for consumers, which will weigh particularly heavily on first-time savers and those with less financial confidence who will naturally be more hesitant to explore new products.

“Simply cutting the tax-fee allowance on cash Isas will not necessarily prompt equal inflows into investing products either.

“People opt to use cash Isas over their stocks and shares counterparts for a multitude of reasons, including risk aversion, and reducing the amount of money these savers can put into the cash Isa is unlikely to change this mindset.

“Cash Isas specifically are perfect for anyone looking to build up emergency savings and achieve their short to medium-term financial goals.

“Once people have the peace of mind and security that cash savings provide they are more likely to have the confidence to start investing for their future.”

Jeremy Cox, head of strategy at Coventry Building Society, said: “The days of peaks and troughs in the cash Isa market are long gone.

“We used to see a rush to make the most of the cash Isa allowance by savvy savers at the beginning and end of each tax year.

“Since the recent uncertainty around the future cash Isa limit, and with higher interest rates eating into the tax-free personal savings allowance, more savers have been topping up their Isa contributions every month.”

He added: “Changing limits around cash Isas would be a risky move for the Government – these accounts are extremely popular with millions of savers, many close to or in retirement who don’t want the risk and uncertainty associated with investment in stocks and shares.

“The billions being saved every year are an indication of how tax policy can be really successful in encouraging people to save responsibly.”

But Michael Healy, UK managing director of trading platform IG, said: “We’re calling for the cash Isa to be scrapped altogether, so we can start channelling more tax relief and long-term wealth into reviving the UK stock market.

“Successfully building a culture of investing would have a seismic impact.”

In May, Ms Reeves confirmed she does not plan to reduce the overall £20,000 limit on the amount that can be put into Isas each year.

In an interview broadcast on BBC Newscast, the Chancellor was asked whether, in a few years’ time, someone would be able to put a whole £20,000 per year into an Isa, as they are able to do now.

Ms Reeves told the BBC: “First of all, very few people are able to save £20,000 a year … we still want people to be able to save and I’m certainly not going to reduce that limit.”

The Financial Times reported this week that, according to a Whitehall figure, discussions were still taking place about the precise level for the cash Isas.

While cash savings provide an important financial buffer, the Government also wants to see more consumers benefit from the long-term returns that investing can provide.

Ms Reeves has said: “It’s really important that we support people to save, to achieve their aspirations.

“I’m not going to reduce the £20,000 Isa limit but I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings.”