Following speculation about potential changes to the contribution levels permitted for cash ISAs, the Chancellor has now put on hold plans to reduce subscription limits from the current £20,000 per year.
I wrote back in February why Rachel Reeves was considering reducing the cash ISA limit but it looks like backlash from banks and building societies who use money deposited in cash ISAs as a cheap source of funds for funding mortgage and other lending has prevailed.
The Chancellor still wants to encourage savers to put money into stocks and shares ISAs rather than using cash ISAs so I wanted to explain what appears to be behind her views.
Her concern appears to be that savers in the UK do not understand that shares have historically outperformed cash particularly over longer time periods such as multiple years. Using cash rather than shares for longer term saving such as with Junior ISAs can mean that you are missing out on potential growth. Although past performance cannot be used as a guide to future performance, over the last 10 years the MSCI global index, for example, grew at an average rate of 11.1%*. Over the same period, the UK base rate was below 1%, only reaching 5.25% between October 23 and July 24.
Rachel Reeves was quoted as saying that “for too long, we have presented investment in too negative a light, quick to warn people of the risks, without giving proper weight to the benefits.”
I believe she is referring to the risk warnings that providers like us are required to prominently display such as “Capital at Risk” or “The value of investments can go down as well as up. You may get less than you invest”. While these things are undoubtedly true, saving in cash also has risks. As well as potentially receiving lower returns than investing, savers are exposed to inflation risk: if the inflation rate is higher than the interest rate offered on savings, then over time the value of your savings could actually be eroded.
Some in the financial services industry have suggested adding inflation risk warnings to cash ISAs or using more balanced risk warnings on stocks and shares accounts such as “Investing can over the long term outperform cash. However, investments can go up and down and you may lose money as well.” The Chancellor also proposed that banks suggest to savers that they consider switching to stocks and shares.
Personally I am supportive of any initiative that helps educate consumers as to the true impact of choices they make. Yet I worry that the government telling banks to suggest their own investment product to cash savers runs the risk of people being sold poor value or inappropriate investments. For example: when the Child Trust Fund was introduced by the Government 20 years ago, providers were allowed to charge up to 1.5% and some of the products offered by banks had relatively poor performance. As a result, there are still children today who have CTFs that are significantly higher cost that Junior ISAs offered by Beanstalk and others. Ideally the Chancellor’s initiatives help consumers understand the risks and rewards of investing in cash or different types of investments so they can make the best choice for themselves given their situation and risk appetite.
*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%.