Chancellor pauses plans to reform the cash ISA allowance, for now

It comes after her proposals for ISA reforms faced backlash from banks, building societies and other industry bodies.

Reports have emerged today (11 July) that the Chancellor of the Exchequer, Rachel Reeves, will delay her plans to reform the ISA allowance.

At the start of the month, Government officials disclosed that Reeves would announce plans to cut the annual cash ISA allowance in her Mansion House speech on Tuesday 15 July, in a bid to encourage savers to invest their money and boost the economy instead of storing it in savings.

However, it appears that any cuts to the cash ISA allowance are on hold, at least for now.

“The Government’s desire to stimulate growth should not come at the cost of savers who are not looking to invest, and reports that the Chancellor is set to push pause on plans to cut the cash ISA limits is welcome news,” Adam French, Consumer Expert at Moneyfactscompare.co.uk, commented.

Many savers seem to have been worried about losing their allowance, as Skipton Building Society saw a surge in cash ISA applications since the news of a potential cut, rising by 45% week-on-week.

But, while any immediate plans to change the cash ISA allowance are seemingly off the table, the Government is still expected to review the current ISA rules, in consultation with key stakeholders in the industry. This means there may be changes to these tax-free wrappers at some point in the future.

Consequences of a cut

Many financial organisations and campaigners have highlighted the potential risks of reducing the amount savers could deposit into cash ISAs, with the Building Societies Association (BSA) signing an open letter calling on the Government to keep the current £20,000 cash ISA allowance. This letter was signed by a range of building societies and different industry bodies, including Moneyfacts.

They highlighted that cash ISAs have many different purposes and are important products for building an emergency fund, saving for a house deposit or other short-term goals and for putting aside money for retirement, to name a few.

“Simply changing ISA limits is unlikely to encourage people to invest, but it will hurt people who are responsibly saving for short-term goals, where investing may not be appropriate,” Robin Fieth, Chief Executive of the Building Societies Association, explained.

Moreover, many building societies pointed out that they rely on ISA deposits to fund other parts of their business, including mortgage lending. As a result, there were concerns that lowering the cash ISA limit could raise the cost of mortgages, making it more difficult for individuals to achieve their dreams of homeownership.

“Clearly, there would have been real consequences if any cut to the cash ISA allowance has not been thought out thoroughly,” French noted.

Incentivising investment

Those in support of reducing the cash ISA allowance hope that, if savers can no longer deposit as much in tax-free cash ISAs, they will invest their money in stocks and shares ISAs or other investment products.

However, French points out that “many savers are fearful of stocks plunging and losing a portion of their original investment”.

Indeed, data from Nottingham Building Society found that only 38% of cash ISA holders would consider switching to a stocks and shares ISA if the allowance was cut.

This indicates that many savers are worried about the risks of investing, or simply don’t feel they know enough about it, to feel confident putting their money in stocks and shares ISAs and other investment platforms.

“Equipping savers to navigate this volatility instead requires a change in our cultural, educational and advice approach to saving and investing,” French explained.

Encouragingly, the Financial Conduct Authority (FCA) recently announced proposals to offer consumers more support with pensions and investing, by giving them more access to targeted advice and guidance. This aims to help people feel more comfortable making informed financial choices, which could subsequently make them more confident at making decisions about investments.