Savers facing ‘long-term threat’ to cash Isa limits following spring statement

Concerns that cash Isa allowances are under “threat” have been expressed, as the Government said it is looking at options for reforms.

There have previously been reports that the idea of lowering the annual cash Isa allowance to £4,000, from £20,000, was being mooted, to encourage more people to put their money into investments.

Several organisations, including building societies, have pushed back against the idea, while others have argued that it could encourage budding investors.

We remain concerned about the long-term threat of a reduction in cash Isa allowances

Government spring statement documents said: “The Government is looking at options for reforms to Individual Savings Accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.

“Alongside this, the Government is working closely with the Financial Conduct Authority to deliver a system of targeted support to give people the confidence to invest.”

Treasury costings documents released with the spring statement assume the overall Isa limit of £20,000 remains in place up to and including 2029/30.

The Government feels that engaging with stakeholders across the board is an important part of its work to boost financial services growth and competitiveness.

Richard Fearon, chief executive of Leeds Building Society, said: “We remain concerned about the long-term threat of a reduction in cash Isa allowances.

“Reducing the amount which can be saved would have significant effects on savers, mortgage rates and wider aims to increase the size of the mutual sector.

“We will continue to make the case on behalf of our members for retaining the current rules, whether that comes as a single change or part of wider Isa reforms.”

Reducing cash Isa allowances will be deeply unpopular with millions of savers

Jeremy Cox, head of strategy at Coventry Building Society, said the current “sigh of relief” for savers “may be short-lived”.

He said: “We believe that the current Isa allowance offers simplicity and balance, allowing flexible saving and investing. Cutting tax-free limits or adding complexity with the amounts people can shelter from tax for cash or stocks and shares won’t stop savers looking for low-risk, accessible cash accounts.

“Such changes will only lead to confusion for savers and higher costs for savings providers and HMRC, whilst making little impact on UK equity investment. One thing is certain – reducing cash Isa allowances will be deeply unpopular with millions of savers.”

Rachel Springall, a finance expert at Moneyfactscompare.co.uk said: “There will be savers out there who do not want to be forced to place their hard-earned cash in a pot which could be at risk.

“A stocks and shares Isa is suitable for those who intend to invest over the longer-term, as fund performance can fluctuate over shorter-term timescales.

“However, over the longer-term, stocks and shares Isa can outpace cash returns and beat inflation, but there is never a guarantee that funds will perform well.”

There will be savers out there who do not want to be forced to place their hard-earned cash in a pot which could be at risk

Richard Wilson, chief executive of interactive investor, said: “For some people, having their cash in an Isa is sensible, for others filling their Isa with stocks is the right choice. What is dumb is to load the bases to incentivise the wrong choice.”

Andrew Gall, head of savings and economics at the Building Societies Association (BSA), said: “We’re pleased that the Chancellor (Rachel Reeves) did not make any changes to Isas in today’s spring statement, recognising the range of views on cash Isas.

“We hope the Chancellor remains mindful that any reduction in the cash Isa limit will not only reduce choice and income for many savers who are committed to cash savings, but it is also likely to lead to wider unintended consequences, without delivering the desired economic growth.

“Cash deposits are an essential part of the funding which building societies use for mortgage lending, supporting housebuilding and homeownership.

“Substantially reducing the role of cash Isas could have knock-on impacts on the interest rates and availability of these loans if providers had to raise the funds from other sources.”

Jason Hollands, managing director of Bestinvest, an online investment service owned by Evelyn Partners, said: “Capping cash Isas as a proportion of the current allowance would essentially turn the clock back by a decade, as prior to July 1 2014 the proportion of the Isa allowance that could be held in cash was limited to 50% of the overall allowance.

Capping cash Isas as a proportion of the current allowance would essentially turn the clock back by a decade

“While it is undoubtedly true that too many people keep excess savings in cash and could be missing out on the higher long-term returns that can be achieved from investing, anything that reduces choice and flexibility is a step backward. For some people, investing will simply be too risky and so a reduction in cash Isa limits will just end up exposing more of their savings to tax in standard savings accounts – particularly with the personal savings allowance frozen and dwindling in real terms.”

Mr Hollands added: “The key question is at what level a cap might be set. An annual cash limit of £10,000 for instance would not impact many cash Isa savers but a £4,000 limit, which has been speculated on, would prove a blow.”

Anne Fairweather, head of public policy and government affairs at Hargreaves Lansdown said the Government’s approach “makes sense”.

She said: “We’re fully behind the Government’s mission to increase retail investment, and it’s good to see that rather than making an arbitrary change to cash Isas, the Government is taking a more measured and holistic approach, exploring the best ways to support saving and investing through Isas.

“Isas are the first port of call for first-time investors, keeping the framework simple and easy to navigate will help build a British retail investment culture.

“It makes sense not to rush this process. Major change is already on the way, because the advice boundary review will introduce targeted support for retail investors, guiding them to get the asset mix that it right for them, in their circumstances.

“A slower pace of change to the Isa suite will enable the Government to assess the impact of these changes before considering what else should be done.”

We're fully behind the Government's mission to increase retail investment, and it’s good to see that rather than making an arbitrary change to cash Isas, the Government is taking a more measured and holistic approach

Chris Cummings, chief executive of the Investment Association, said: “We welcome today’s commitment from Government to boost the culture of retail investment, including looking at options for Isas reforms that will get the balance right between cash and equities to earn better returns for savers.

“Our industry has long called for the Government to create a culture of inclusive investment, which will see more people benefit from investing, and we’re pleased that the Government has now heeded this call.”

The average value of the top 25 stocks and shares Isas is around £8.8 million, compared with £650,000 for the top 25 cash Isas, according to figures obtained from HM Revenue and Customs (HMRC) by money app Plum, covering the year 2021/22.

Meanwhile, some pension experts welcomed a lack of announcements affecting retirement funds, saying it would give people room to plan.

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said the “quiet” spring statement for pensions is “something to be grateful for,” giving people “valuable breathing room for long-term planning”.

Steven Cameron, pensions director at Aegon, said: ”We know further changes are coming in this summer’s Pension Schemes Bill which will include new measures to ensure all pensions offer good value for money and plans to consolidate small pension pots individuals may have left behind when changing employers.”

Mr Cameron added: “Looking ahead, should budgetary pressures worsen, future changes to the state pension cannot be ruled out. There is an ongoing review of the state pension age.”

He added: “We also can’t ignore the state pension ‘triple lock’, which has proven costly and unpredictable in recent years. While the Government is currently committed to maintaining it, the formula might be adapted.”