Hands off our cash Isas! Don’t punish savers for choosing safety! Don’t force everyone into stocks and shares! Think of the havoc you’ll cause for first-time buyers if you deprive banks and building societies of their stickiest source of deposits! Don’t fall for the self-interested lobbying of City fund managers!
The cries were loud and furious before the spring statement and, in the event, Rachel Reeves did nothing on Isas. But prepare to have this quarrel all over again in the autumn because the documents confirmed the Treasury is still considering a cap on cash within an individual’s £20,000-a-year allowance.
“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,” said the statement.
The howls of protest will continue, then. But actually, Reeves is right to look at changes. The £20,000 allowance is generous by European standards. It is not unreasonable for the Treasury to ask if tax reliefs would do better work for everyone – savers included – if greater sums were directed at productive assets, such as UK equities.
Such a reform would be in line with the original spirit of Isas and their 1980s predecessors, Peps (personal equity plans) and Tessas (tax-exempt special savings accounts). On their introduction in 1999, the Isa allowance was £7,000, of which only £3,000 could go into cash. It was only as late as 2014, under George Osborne, that allowances were merged (and boosted to £15,000) and savers were given complete freedom to allocate as they wish.
The old thinking was that savers enjoy a better return over any long-term period by being exposed to shares, a finding supported by virtually every statistical study. And it was also that tax reliefs should play a role in feeding capital into the UK funding pot for companies. Given the state of panic over the sleepy state of the London stock market, especially outside the big companies in the FTSE 100 index, that is not a small consideration.
What would be a good “balance” for Isa rule-setting purposes? The pre-statement whisper said Reeves was considering a cash limit of only £4,000 or £5,000, which would be radical. Politically speaking, it may be too radical. But a 50:50 split – in other words, keep the £20,000 overall allowance but only £10,000 could go into cash – might do the trick.
That version of reform is backed by the New Financial thinktank and has the virtue of simplicity within an over-complicated Isa landscape. A cash cap at £10,000 would also leave most savers unaffected because three-quarters of allocations to cash Isas are below that level; most of the safety-first brigade could stick to existing habits.
Instead, it would be those wealthy savers who max out their £20,000 allowance every year, and slot all or most of it into cash, who would be affected. The flow of money to the stock market might still be substantial – up to £10bn a year, thinks New Financial.
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If Reeves is serious about reform, however, she should make two other moves. First, the share-only portion ought to be UK-only. If the goal is to improve funding costs for UK companies, every pound that goes into global tracker funds, or is used for a flutter on Nvidia, misses the target. The Tory chancellor Jeremy Hunt’s unrealised vision of a “British Isa” – a UK-only £5,000 top-up above the £20,000 – would have been fiddly and ineffective. Better to go the whole hog and make a pure case that UK tax reliefs should benefit UK-listed companies and UK-listed funds.
Second, a pet grumble of this column: stamp duty on shares. The 0.5% levy on purchases of shares in UK companies brings in £3bn-plus to the Treasury, so immediate abolition is probably out of the question, even though no other major market imposes an equivalent charge at that level. But a commitment to phase out the levy over five years would be a useful signal. Reeves would be able to say she’s prodding savers towards shares while making the process cheaper. It still wouldn’t satisfy the cash-only diehards, but a chancellor’s horizons should be wider.
