It has been reported that the Chancellor is considering halving the tax-free allowance from its current level of £20,000 to encourage people to invest their money.
Rumours that Chancellor Rachel Reeves wants to reform the cash ISA began circulating before the March Spring Budget, then again ahead of the July Mansion House Speech, but no announcements were made at either fiscal event. It is now being reported that changes to the savings mechanism could finally be announced at the Autumn Budget next month.
A spokesperson for the Treasury said: “Cash savings are important for people looking to put cash away for a rainy day, and we will protect that.
“But the Chancellor has been clear that she wants to get Britain investing again – so British companies can grow and British savers who choose to can get more in return.”
It is understood that the Treasury is considering options for reform, including changes to the cash ISA limit, but no decisions have been made.
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Any reforms will be to boost saver returns and economic growth.
In a speech at the Investment Association dinner on Tuesday night, Economic Secretary Lisa Rigby said: “Someone who put away £1,000 in a cash ISA every April since 1999 would now hold about £34,000. If they had instead invested in a stocks and shares ISA instead, they could now have around £83,000 – over twice as much.”
Lowering cash ISA limit could raise mortgage costs
Lenders warned that discouraging consumers from saving their money with banks and building societies could negatively impact access to mortgage finance.
Charlotte Harrison, CEO, home financing at Skipton Group, said: “Building societies, which fund over a third of all first-time buyer mortgages, rely on retail deposits like cash ISAs to fund their lending. If ISA inflows fall, the cost of funding is likely to rise, and that means mortgages could become both more expensive and harder to access.”
Harrison said this risked “derailing” the government’s target of building 1.5 million homes, as this depended on buyers being able to obtain affordable mortgage finance.
She continued: “At Skipton, we back getting more people to invest, absolutely. But not by penalising savers who want low-risk, flexible options. Cash ISAs work. Undermining them doesn’t.
“What’s needed now is a government-supported, industry-led campaign to boost financial awareness, helping people make confident choices about when to save and when to invest.
“We’ve raised our concerns directly with ministers and will keep pushing for a balanced approach which protects savers and supports homeownership.”
Andrew Gall, head of savings at the Building Societies Association, said it was concerning that the Chancellor was still considering cuts to cash ISA limits.
Gall added: “We always knew that the battle was not won, but what’s really disappointing is that the Chancellor seems only to be listening to the investment businesses who would benefit from the changes.
“We absolutely support the calls for more people to invest, especially in the UK. Cutting the cash ISA limit simply won’t achieve that aim.”
Gall said cutting the cash ISA limit would “undermine a brilliant savings product” that helped people develop a savings habit and financial resilience.
“People use cash ISAs for a variety of purposes, including using them as an emergency buffer, saving for a house deposit or managing their finances in retirement,” he added.
Gall said this would also make mortgages more expensive and make the ISA system more complex and costly to administer.
“Starting to save is a crucial part of the journey to investing – undermining cash ISAs risks undermining the very investment culture that we should be trying to build on top of its strong foundations,” he said.
Don’t take away savers’ choice
Jeremy Cox, head of strategy at Coventry Building Society, said the simplicity of the ISA was one of its greatest strengths, allowing savers to switch between the stock market and cash or have a mix of the two.
He added: “Upsetting this balance by reducing the cash ISA allowance is going to make it far more complex in one fell swoop. In nudging people toward investing more, the Chancellor needs to be careful she doesn’t throw the baby out with the bathwater and discourage people from building up their cash savings too.
“The ISA remains one of the most popular ways to save or invest, and our members keep telling us how unpopular any change to their annual cash allowance would be.”
Mark Burges Watson, co-founder of investment app Kaldi, agreed that lenders relied on cash ISAs as a “cheap source of funding for mortgages and other lending”, and said if costs rose, this could push up mortgage rates.
However, Burges Watson said while it was important to remember that people held cash for “safety, liquidity and peace of mind”, the cash ISA lost money once inflation was taken into account.
