Spelling out refinements to ISAs
Many commentators agree that some reform of individual savings accounts (ISAs) was required, and also that people should be encouraged to invest more to benefit both the UK economy and their own incomes.
However, the changes announced by Rachel Reeves in the Budget on Wednesday seem to have failed to meet the mark with a lot of the finance industry, creating concern that ISAs will now be more complex and won’t persuade savers to invest, rather than rely on putting cash away.
The tax-free Cash ISA limit will be cut from £20,000 to £12,000. And while £20,000 can still be paid into an ISA each year, £8,000 will be designated for investment – stocks and shares– not cash savings. Only those over the age of 65 will keep the full cash allowance of £20,000.The aim of the cut to the Cash ISA limit – effective from April 2027 – is to encourage retail investment.
It was also announced that the government is to consult on the Lifetime ISA early next year and will consider replacing it with a new ISA product designed to help first-time buyers fund the purchase of a home.
Scotsman Money has compiled the views of experts who set out both the pros and cons of the announced ISA overhaul.
Adam Ruddle, chief investment officer at LV=, says that while the change may disappoint Cash ISA savers, it’s important to consider alternatives, such as Stocks and Shares ISAs.
He says: “Although Cash ISAs remain a popular savings vehicle, Stocks and Shares ISAs may present a compelling alternative, particularly now that the cash allowance has been reduced.
“Recent research from LV=’s Wealth & Wellbeing programme found that nearly one in ten UK adults shifted their funds into cash or low-risk accounts in response to market volatility, political uncertainty, and global events. Following the changes, we anticipate a reversal in this trend, with more people exploring investment options through Stocks and Shares ISAs.”
Dan Coatsworth, head of markets at AJ Bell, says: “The ISA system in general is too complicated, and the Lifetime ISA is one of the worst offenders, featuring withdrawal penalties for certain circumstances and a cap on property purchase limits that hasn’t kept pace with the broader property market. Lifetime ISA providers have repeatedly asked policymakers to look at fixing these problems to help savers and investors.
“Replacing the Lifetime ISA could essentially mean bringing back the Help to Buy ISA under a new guise.
“The government is keen to help more people get on the housing ladder and any financial incentives to support those hoping to achieve this dream will be welcome.
“It begs the question as to what will happen to existing Lifetime ISA customers. Those using the account for retirement savings will want to know if they’re stuck in a legacy account, or if they are able to transfer to a different account.
“Through the consultation process, the government needs to make sure consumers come first and that the number-one priority is for existing Lifetime ISA customers to get a good outcome.”
Dan adds: “As it stands, the brief mention in the Budget documents about potential changes to the Lifetime ISA creates further uncertainty. The government wants to encourage more people to invest, and constantly changing the ISA system is unhelpful.”
Rachel Springall, finance expert at Moneyfacts, says: “Cutting the Cash ISA allowance is intended to push savers to consider investing, but it will take a lot of educational work to shift the culture of investing in the UK. However, it is a good decision for the government to acknowledge those who want risk-free pots later in life.
“Cash ISAs are popular and have hit milestones this year. Not only has there been a record number of products and providers offering them, but there have also been significant deposits made by savers to shield their cash from tax.
“Savers should feel supported and empowered to save risk-free, but there is no denying that cash savings have been struggling over the years to beat inflation.
“The Cash ISA limit cut can have repercussions on institutions, like mutuals, who use ISA deposits as a source of funding, so we could start to see mortgage rates increase, which would cause chaos in the housing market.”
Richard Stone, chief executive of the Association of Investment Companies (AIC), says: “This is a carefully considered solution that promotes the benefits of investing in the stock market for the long term, whilst addressing concerns of older savers who prioritise financial certainty.
“Cutting the Cash ISA limit is a milestone towards creating a nation of investors. Combined with the planned advertising campaign, changes to risk warnings and the FCA’s targeted support initiative, it will all help people make better long-term investment decisions. We need a strong investment culture in the UK and it is encouraging to see the government starting to build the foundations for this.
“The new Cash ISA limit will incentivise more than two million people to start investing in the stock market – rather than taking the risk of their long-term savings being eaten away by inflation.
“Of course people need to save cash for a rainy day, but encouraging them to move beyond that will improve their financial resilience, achieve better financial outcomes, and bring benefits to the broader economy.”
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