Some building societies have reported seeing a jump in cash Isa applications following speculation that the limit could be cut.
Reports have suggested that plans to cut the annual tax-free cash Isa allowance could be announced in Chancellor Rachel Reeves’s Mansion House speech on July 15.
The Government is looking at options for reforms to Isas to get what it feels is the right balance between cash and equities, to help savers earn better returns, boost the culture of retail investment, and support the push for growth.
Skipton Building Society said that in the week starting on June 30, cash Isa applications at the Society rose by 45%, compared with the previous week.
Charlotte Harrison, chief executive of home financing at Skipton Building Society, said: “For over two decades, cash Isas have helped millions of people build funds for a rainy day, save for home deposits, and protect their short and medium-term financial goals without worrying about tax eating into their returns. Undermining that with a rushed cut to the annual allowance would be a serious mistake.”
She added: “Building societies, which account for over 35% of all first-time buyer lending, rely on retail deposits, including cash Isas, to fund mortgage 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.
“That risks directly undermining the Government’s own target of building 1.5 million new homes, a goal that depends on buyers being able to secure affordable mortgage finance.”
Skipton said that rather than reducing allowances, it supports an industry-led education campaign, funded by investment managers, to help consumers understand when to save and when to invest, focused on education, awareness, and informed decision-making.
The Society said investing is a powerful tool. But it said that for people such as first-time savers, lower earners, or those approaching or in retirement, cash savings could be a safer, more appropriate option.
Investments may potentially outperform cash savings in the longer term, but savers need to understand the risks involved as the value of investments can go down as well as up.
Leeds Building Society also said that during the week starting June 30 it saw a 47% increase in cash Isas being opened compared with the same period the week before.
Andy Moody, chief commercial officer at Leeds Building Society, said: “While there has been no confirmation from the Government, the rumoured decision on cutting cash Isa allowances is deeply disappointing.”
He added: “Many of the Society’s savers have voiced their worries about cuts to the allowance and we support their opposition to potential changes.
“Not every saver wants to expose themselves to the possibility of their returns being undermined by short-term movements in stock prices, and we strongly believe that savers should not face restrictions in choice.
“Reducing the tax-free allowance would also have a negative impact on mortgage rates. For mutuals like ourselves, the savings our members deposit with us go towards funding our mortgages and putting homeownership within reach of more people, and decisions aimed at boosting the economy may indeed have the opposite effect.”
Rachel Vahey, head of public policy at wealth manager AJ Bell said: “AJ Bell’s analysis of HMRC figures suggests around £100 billion is held by people with £20,000 or more in cash Isas who have not invested a penny in stocks and shares Isas.
“Millions of people have large cash balances – easily sufficient to serve as a ‘rainy day’ emergency fund – but hold no investments whatsoever.
“Rumours are swirling that the chancellor may seek to reduce the annual contribution permissible in a cash Isa product, hoping that will encourage more people to invest for better long-term returns and bolstering UK capital markets in the process.
“AJ Bell have long argued such rules and restrictions are the wrong way to go. Our research suggests that most savers would simply park their money in taxable savings accounts or NS&I products, with just a fifth (21%) saying they’d invest in the UK stock market instead if the cash Isa allowance were cut.
“The key to unlocking investment instead needs to involve simplification. Trying to corral consumers into UK investments by introducing new products, restricting cash Isa limits or introducing mandatory investment quotas will only add complexity and leave consumers lost in an increasingly complex web of saving and investing rules.”
Sarah Coles, head of personal finance, Hargreaves Lansdown said that any potential cut in the cash Isa allowance “could end up doing more harm than good”.
She said: “It risks undermining people’s faith in the security and certainty of Isas. Our experience also shows that over time, huge numbers of cash Isa holders will build their familiarity with investments, open stocks and shares Isas and transfer from cash to investments.
“Our data shows more than a third of clients (36%) who initially open a cash Isa go on to invest with HL (Hargreaves Lansdown) within a year. This trend is far more striking than the move from regular savings accounts to investing – where it’s between a fifth and a quarter.
“By limiting how much they can put into cash Isas in the interim, there will actually be less to move into stocks and shares Isas in the future. It risks having precisely the opposite impact to the one the Government might have in mind.”
But Michael Healy, UK managing director at IG said: “The time for gentle nudges is over – we need a bold reset to get Britain’s money moving.
“Fully scrapping the cash Isa is the only way to break the cycle and ensure savers are properly incentivised to think beyond cash and start building genuine long-term wealth.”
A new Revitalising UK Public Markets report from the CBI said: “A robust public equity market depends not only on institutional investment but also on vibrant retail participation.
“Yet the proportion of households with direct stock market exposure through retail savings remains stubbornly low. In 2022, barely 12% of households directly owned stocks and shares, and the FCA reported that 58% of adults with at least £10,000 of investible assets kept three-quarters or more of it in cash.”
The report continued: “Given the recent indications of a formal review process into the Isa system, the Government should consider that attempts to redirect cash savings are unlikely to be sufficient without a parallel effort to build trust and reduce friction in the retail investment journey.
“For industry, this could come in the form of more balanced risk disclosures, focusing on fair and contextual messaging, and a retail focused marketing campaign.”
Rupert Soames, CBI chairman said: “The opportunity now is for the UK to build on the work already done to lead the world in finding innovative solutions which will once again make London attractive to companies wishing to raise capital and list their stock, and to retail and institutional investors who wish to participate in the wealth creation owning stocks and shares provide.”
Ms Reeves has said previously: “It’s really important that we support people to save, to achieve their aspirations.
“I’m not going to reduce the £20,000 Isa limit but I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings.”
Andrew Prosser, head of investments at InvestEngine, said: “Younger savers are likely using cash or Lifetime Isas to fund big life purchases like a house deposit, while older savers are using them to fund short-term spending needs.
“Neither of these groups will want to risk the value of their funds fluctuating, as it would with investing. It’s more likely that they simply continue to hold the same amount of cash, but as the cash Isa limit would be lower, more of it would be outside the Isa tax wrapper.
“UK savers may well end up worse off, as they’d have to pay more tax on interest on their savings.”
