Recent press reports have suggested that Rachel Reeves may be considering a change to the rules around cash ISAs. According to the Daily Telegraph, she could potentially reduce the contribution allowance to £4,000 per year from the current level of £20,000.
While there is no confirmation that cash ISA allowances will change, we wanted to explain why ISA rules might change, what the reaction has been and whether a change is a good or bad thing.
Why might the government change cash ISA allowances?
The story appears to have emerged after Rachel Reeves met City executives to discuss how to encourage greater investment in stocks and shares with the goal of delivering “better returns” for retail savers.
Rachel Reeves herself told broadcasters: “It is really important that we support people to save to achieve their aspirations. I do want to create more of a culture in the UK of retail investing like what you have in the United States, to earn better returns for savers. At the moment, there is a £20,000 limit on what you can put into either cash or equities (ISAs) but we want to get that balance right.” In doing so, she appeared to confirm that changes may be made.
The logic behind potentially making changes to the cash ISA allowance seems to be to encourage savers to put money into investments rather than cash savings. Compared to countries like the US, UK consumers tend to be more risk averse putting more of their savings into cash rather than stocks and shares. For example: HMRC data shows that from 2016 to 2023 over half of subscriptions into Junior ISAs in total were into cash JISAs as opposed to stocks & shares JISAs.
As we have discussed in other articles such as here, shares have historically outperformed cash particularly over longer time periods. So by using cash rather than shares for longer term saving such as with Junior ISAs, savers may be missing out. Although past performance cannot be used as a guide to future performance, particularly as interest rates were very low over the period, over the last 10 years, the MSCI global index grew at an average rate of 11.1%*. For much of the same period, the UK base rate was below 1%, only reaching 5.25% between October 23 and July 24.
What has the reaction been?
Not surprisingly much of the negative reaction to the potential cash ISA allowance change appears to be from banks and building societies who have most to lose. They have argued that if less cash is saved, then mortgage / other lending availability and rates may be impacted as banks and building societies make use of cash deposits to help fund their lending.
The Daily Telegraph and others also highlighted a potential impact on pensioners who often prefer the certainty of cash interest rates and have lower risk appetite. We will have to wait and see whether this influences the Chancellor’s views or indeed whether they make any changes.
Would a change be a good or bad thing?
We believe that putting money aside for the future is a good thing and clearly ISA allowances play an important role in encouraging people to do this, both through the tax benefits and the simplicity of not having to report income or gains in tax returns to HMRC.
Cash and investments can both play a role in people’s savings. Some people just don’t want to take risk so prefer the certainty of cash and, depending on the time period and what you are saving for, cash may also be better for you than investments. The value of investments can go up and down sharply and you may not want to incur the risk of losses if you need cash in a hurry.
However, there is no doubt that many people saving in cash for the long term may not fully understand the potential loss of returns they are incurring versus using a well-diversified portfolio of stocks and shares. Encouraging a greater understanding of the risks and rewards of both so people can make well informed decisions is we believe a good thing. Whether the carrot and stick approach of differential allowances is the right way to go is another matter, so we will have to see what they decide.
*Source: MSCI world index fact sheet, growth over 10 years until 31/1/25. Growth is calculated in dollars, calculated in pounds it was 13.2%.