I’ve been a fierce critic of the chancellor, Rachel Reeves – and I make no apology for that. But reducing the cash ISA allowance is a policy I can actually get behind – even if it’s proved controversial in other circles. In fact, I’d go one further and say it’s time ISAs were scrapped altogether.
As it stands, Britons can currently save up to £20,000 tax-free via ISAs – either in cash, stocks and shares, or “innovative finance”, which basically involves the account holder becoming a lender. You can mix and match the three options up to the maximum amount in any one year. Cash ISAs have, however, become by far the most popular, despite offering the least.
Why? As Richard Watkins, a certified financial planner at Continuum, explains: “In 2022/23 the total value of adult ISAs amounted to £71.6bn – of which, 63.2 per cent or £45.2bn was held in cash ISAs. Cash ISA subscriptions have increased and stocks and shares ISA investment has decreased, as people are apprehensive about the future.”
That is, of course, the result for just one year. A grand total of £300bn is sitting in these vehicles, earning interest which may not even beat inflation, currently 3.4 per cent. Per MoneySavingExpert, the very best “brand name” cash ISAs (meaning that you’ll have probably heard of the provider) pay 4.1 per cent per annum (Skipton and Leeds Building Society, but there is a Tesco offering that gets close).
However, the best rates typically come with strings. You may have to surrender some flexibility or maintain a minimum balance. Interest rates are also subject to change if the Bank of England lowers rates – which it is gradually doing. Fixed-rate accounts are available, but they pay less.
Reeves wants to see more of our savings put to work for the economy, and to help revive London’s increasingly moribund stock exchange. One of the reasons that Britain’s best young companies have been heading for Wall Street is because of the vast pool of investment capital on the street of dreams. While there are no guarantees, that could change if the chancellor can find a way to boost what London can offer.
IG, the City firm, has called for cash ISAs to be put to the sword to that end. It would also be good for savers.
Yes, investing in stocks and shares involves taking more risk. But honestly? People with the capacity to pump thousands of pounds into cash ISAs can probably afford to do that – and the rewards, over time, should comfortably exceed even the very best cash ISA.
IG notes that the compound annual return from the FTSE 100 over 20 years (assuming you reinvest dividends) comes to 6.4 per cent. Fund managers levy charges which will eat into that, but if you choose a fund that tracks the index, these are low. When you invest also plays a role: the five-year figure is more than double that. But you get the picture...
Watkins adds: “A cash cushion is essential, but if you want a comfortable future for yourself, then some risk-taking is essential. No one will do it for you, and you need to get on with it, as time generally serves those who display commitment, patience and discipline. It is a regular conversation I have with clients about sticking to the plan, adapting when required, but seeing uncertainty as an opportunity rather than a threat.”
He’s right, and this is advice I’ve followed with my own savings – most of which are in the markets because that is where the returns are.
Watkins also points out that there will still be options open for those seeking less risk: “It may be worth looking at a reasonably stable low-cost gilt and/or bond fund that can provide a regular income and should not fall foul of changes to cash ISA allowances that may happen. There is an element of risk as no asset is risk-free, but they can offer an alternative to cash ISAs. All is not lost.”
Ending the cash ISA will prove even more controversial, still. As the figures show, it is a highly popular product, and voters tend not to thank politicians who take things away from them (though we don’t know the extent of Reeves’s plans yet).
But consider that the ISA’s tax-free predecessor – the personal equity plan (PEP) – was introduced with the specific intention of creating a “shareholding democracy” by the Thatcher government. There was thus no cash element. Reeves might not enjoy being compared to Margaret Thatcher (although I could be wrong), but if she has the fortitude to press ahead, she would be taking the ISA back to its PEP roots.
She’d also be doing savers a favour. Some of the cash ISAs I found while researching this piece are frankly dismal. Take Barclays, for example. Its “instant access” offering comes with a tax-free annual equivalent interest rate of 1.16 per cent. It is fair to ask whether it is a good use of the government’s limited resources to be subsidising products which lose taxpayers’ money in real terms and whose only purpose, as far as I can tell, would seem to be to generate vast profits for the banks.
Anyone with an account like that should get hold of a transfer form from a more generous provider and switch – now. You have to do that to maintain the tax-free status, rather than withdrawing and investing anew. But it isn’t hard to do.
Chancellor Reeves has had a lot of bad ideas, but this is a good one. She should push the button.
