Will brakes be put on savings vehicle

When checking what was happening in the world on 6 April, 1999, I see that was the day we lost Red Norvo, the American jazz vibraphonist. No, me neither. It’s a day when little else of note seems to have happened, possibly because everyone was too busy with their Y2K preparations.

What did happen that day was the launch of the Individual Savings Account (ISA), a product that significantly changed the options for ordinary savers. It was designed to simplify PEPS and TESSAs and other tax-advantaged savings that had become increasingly complex and confusing.

There’s much speculation at the moment that the ISA itself may be a target for change from a government keen to pull all the levers it can to encourage growth, and which would like to see more investment in the stock market and less in cash.

It’s true that what started as a simple product has become more complex. Until April 2005 you could get Life Insurance, Share and Cash ISAs. The Junior ISA for under-18s was introduced in 2011, the Help to Buy ISA in 2015, with a bonus from the government for buying a first home. The next year, Innovative Finance ISAs arrived allowing people to earn tax-free interest on peer-to-peer loans and crowdfunding. Lifetime ISAs started in 2017, designed for younger people looking to buy their first home or save for retirement. What they all have in common is that any interest, capital growth or dividend income on assets held in the ISA are tax free.

The government has promised to simplify the ISA landscape, including more use of stocks and shares products, and the Cash ISA in particular is under scrutiny. According to HMRC data published last year, of the £726 billion held in adult ISAs £294bn is in cash. When they started only a portion of the allowance could be held in cash – now you can save the maximum £20,000 a year that way.

These are big numbers, and if even a proportion of the money flowing into cash savings was diverted into stocks and shares it could impact the economy.

There are many reasons people like a Cash ISA, mainly to avoid exposing their savings to stock market risk and ease of access. But savings in cash don’t have the potential to increase in the way that stock market investments do – if you’re seeking higher returns you need to be willing to take higher risks.

The FCA is looking at changing the rules, which could mean that financial services firms can do more to point out the downside of holding too much money in cash to their customers.

The government could make changes to the ISA rules to restrict the amounts of money held in cash or to make stocks and shares investments more attractive.

Investment firms are, understandably, keen for them to take this route. But the Building Societies Association wrote to the Chancellor on 5 February, pointing out that they use the deposits to fund loans to households and businesses. They argue that changes to the rules could make mortgages more expensive.

Plenty for Reeves to think about as she considers her Spring Statement, planned for 26 March. While we wait, we could always listen to Red Norvo – he was cool.