Rachel Reeves warned Cash ISA plan faces huge problem with older savers | UK | News

Chancellor Rachel Reeves proposed cut of the tax-free ISA limit to encourage bigger investment in stocks and shares will be shunned by older cash-loving British savers, a finance expert has warned.

The move – branded “p**s people off economics” last week by money guru Martin Lewis –is expected to see Reeves’ slash the tax free £20,000 sum people can save annually in a cash ISA to just £5,000.

The under-pressure Minister is expected to confirm the plan at her Mansion House speech next week in a desperate bid to boost the nation’s ailing finances.

The Daily Express has revealed how older savers with modest balances will be hardest hit by Reeves’s proposed changes, according to worrying new analysis by one of Britain’s biggest building societies. They say axing the £20,000-a-year tax-free allowance would have the biggest negative impact on ordinary savers, with older people left worse off and potentially pushed towards inappropriate higher-risk investments that could harm their life savings.

ISAs currently receive over £9bn in tax benefits per year with UK cash saving accounts across the board hoarding around £2 trillion.

Government insiders say £20,000 doesn’t represent a “rainy day fund” but is a sizeable sum and the £5,000 limit would still be applicable for smaller savers.

Reeves wants to encourage people to move the £2 trillion-worth of savings into investment shares, which she believes would provide the necessary financial impetus to supercharge British industry.

But Victor Trokoudes, founder and CEO at online savings firm Plum, says the plan won’t work because cash-loving Brits simply won’t funnel their cash into “risky” stocks and shares.

He told City Am: “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 to U-turn, then the Building Societies Association has also warned the Chancellor 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.

However Charles Hall, head of research at 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, believes Reeves’ move is the right one.

He said: “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.”