The Debate: Should Rachel Reeves reduce the Cash ISA allowance?
Rachel Reeves is reportedly mulling reducing the amount Brits can save in Cash ISAs, but would such a move actually foster economic growth? Our experts set out the pros and cons in this week’s Debate
YES: At over £2 trillion, Brits save far too much in cash
ISAs receive over £9bn in tax benefits per annum, which is sizeable in the context of the government’s need to meet its fiscal rules. As such, we should be questioning the value of this tax benefit to both individuals and the cobuntry. Does it really make sense to incentivise people to keep their money in cash?
Note this is not rainy day money, this is £20,000 per annum of savings. A limit of £5,000 on the Cash ISA would ensure that people can still save for a rainy day and would encourage investment into higher returning assets. Surely it is far better to encourage investment in shares, which over any meaningful time period materially outperforms the returns on cash. The issue in the UK is not that we save too little in cash, it is that, at over £2 trillion, we save far too much, which means that there is a lack of investment in growth assets.
At the same time we should review the Stocks & Shares ISA. Does it make any sense to give tax incentives to investors to fund the growth of overseas companies? The narrative is often posed that we don’t have great companies to invest in, but we do have global leaders in sectors such as healthcare, energy, banking and defence as well as having funds that give exposure to a broad spread of companies and assets. We also have a host of technology companies looking to float in the UK, which will transform the perception of the London market.
Of course, investors can still access investment overseas, but just without a tax incentive. The Chancellor has a compelling opportunity to help savers generate better returns and accelerate economic growth through changing the focus of ISAs.
Charles Hall is head of research at Peel Hunt
NO: Savers won’t simply funnel their cash into investments
While I share the government’s desire to encourage people to invest over the long term to make their money work harder for them, plans to cut Cash ISAs aren’t the best way to address this. Firstly, Cash ISAs are often used for short-term savings goals where people don’t want to take risks like emergency funds or house deposits, or to protect savings from tax, not long-term financial gain.
Secondly, it’s not clear whether the reforms will get more people to invest. Our research has found that, if Cash ISA limits are cut, savers won’t simply funnel their hard-earned cash into investments to secure tax-free returns instead. In fact, the most popular alternative option is to hold this money in a cash savings account, followed by a current account, rather than investing. And even for those who do turn to investing with the ambition to secure higher returns, there is no guarantee that they would put their money into British companies, as Rachel Reeves is hoping.
If savers’ attitudes weren’t enough to persuade Reeves, then the Building Societies Association has warned Reeves that cuts to Cash ISA limits could increase borrowing costs, as the funds deposited in Cash ISA accounts support lending, helping to keep mortgages and loans affordable and accessible.
If more investment is needed in British businesses, then Reeves could raise the £20,000 Stocks & Shares ISA allowance instead, which could encourage more people to invest without penalising people who prefer to take on less risk. And pensions offer a far bigger opportunity to drive investment in the UK, especially as they are designed for the long term, where investments best perform.
Ultimately, whatever the Chancellor decides, it should not be a snap decision, but a carefully considered one. Most importantly, savers’ interests need to be at the heart of any decisions.
Victor Trokoudes is the founder and CEO at Plum
THE VERDICT
Rachel Reeves’s reported planned cut to the Cash ISA allowance, thought to be announced during her Mansion House speech next week, has proven divisive. While we can all, at least in the City, agree that growth must be this government’s number one prerogative, will Cash ISA reform actually achieve it?
Mr Hall of City investment bank Peel Hunt, which has been vocal in their calls for the Cash ISA limit to be slashed from £20,000 to £5,000, thinks so, and is right to emphasise the benefits on an individual level too, thanks to the higher returns of stocks and shares investments. But Mr Trokoudes is right to be sceptical: reducing the allowance for Cash ISAs is not the same as increasing contributions to Stocks and Shares ISAs. Indeed, as a sobering survey out earlier this year revealed, almost one in five Brits say they’ve never even heard of a Stocks and Shares ISA.
Perhaps then, as both our debaters seem to agree, it is this product, rather than the Cash ISa, that could benefit most from reform – and definitely some PR.