Rachel Reeves could be about to cut the limits that people in the UK can save into a cash ISA, with the current limit of £20,000 per year potentially facing a dramatic reduction to £4,000.
Currently, the £20,000 allowance per person is the total for across all Isa products - including lifetime, or stocks and shares among others - but individuals are free to decide how to allocate the amounts they save or invest in each (within allowed limits) according to preference, need or risk tolerance.
The potential cut to cash Isa allowances is intended to drive people toward investing in stocks and shares Isas, with investing generally offering better returns than savings over the long haul - but also requiring more knowledge from those using them and having more risk of losing money.
Ms Reeves has already spoken to City executives about possible changes and a wider debate continues to go on over Isa reform in general, not limited to only cash products.
Now, the UK’s first Isa millionaire has entered the argument - and while not suggesting a cut as dramatic as Reeves’ potential plan, says the allowance for cash savings should be halved in Isas and even that stocks and shares products should be limited to buying British-only companies.
Speaking to the Financial Times, 82-year-old Lord John Lee said that the “whole purpose of Isas originally was to encourage saving and they have been a huge success. We do want to encourage people to save and if they want to save in a cash Isa, then fine. But the tax advantages [should not be] as attractive as [a stocks and shares] Isas.”
Mr Lee started investing in the Isa’s precursor, the personal equity plan, in the late 1980s, the FT reports. Investing the maximum amounts allowed and reinvesting the dividends earned - therefore utilising the powerful process of compounding - meant that by 2003, his Isa was worth £1m from an original total investment of £126,000.
Isas are particularly beneficial to both savers and investors because all money earned - dividends, capital gains or interest - are tax-free.
Therefore when earnings are rolled back into the equation time after time, your interest earning more interest or your paid dividends earning further gains in future sees compounding have more of an effect with each passing year.
This is the reason that Ms Reeves’ insistence that the UK needs a “culture of investing” makes sense in theory, but sweeping or immediate reforms do not suddenly create this culture, which requires education and time.
“Financial education has been abysmal and we should all be worried that more of our young people are [aware of] cryptocurrencies than traditional forms of investment,” added Mr Lee.
He further suggested that his ideas for reforming the Isa line wouldn’t “dramatically affect [people’s] personal circumstances in terms of having money for emergencies or house deposits” but said it would encourage people to take a long-term view. On older savers who did not want to invest for fear of risk and losing money needed in later years, Mr Lee said it was a “necessary complication” to ensure other generations did invest.
HMRC data showed two-thirds of people saving into a Cash Isa in 2021/22 put under £5,000 across the year.
Meanwhile, after the Building Societies Association told Ms Reeves they would be strongly against any proposals to reduce the Cash Isa allowance, another City executive has spoken out in favour of the cut.
The boss of Schroders, an investment firm with around £770bn worth of assets under management, said that the level playing field between savings and investing allowances was an “anomoly” which should be altered.
“We all accept that we need to grow the UK economy. And to grow the UK economy we probably need more risk-taking than we have today,” said Richard Oldfield.
“If we take the amount of money that goes into Isas, that is a huge tax credit that we’re all paying for and at the moment a large portion of that is going into cash Isas. Over any time period that creates a worse investment outcome for our clients than actually having it in an investment Isa.
“So I think it is a really important debate to have. Having the levels equal is a bit of an anomaly.”
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