The end of the tax year is looming large on the horizon, which means the mad scramble to use our annual Isa allowance before April 5 has begun in earnest.
In the current tax year, you can use an Isa to save or invest a maximum of £20,000, with all subsequent gains – interest on savings, dividends from investments and any share profits – free from tax. A super deal.
Yet the usual spring rush to bag a top-paying cash Isa has been given an extra edge this year. In part, this is a result of savers wanting to snap up the best fixed-rate deals before there are any further cuts in the Bank of England base rate.
But it’s also because of fears that the Chancellor of the Exchequer, Rachel Reeves, is poised to confirm a major shake-up of the tax-friendly Isa that will result in priority being given to investors over savers.
At great peril is your ability to use the annual £20,000 Isa allowance to save rather than invest.
Not good news at all for savers like keen birdwatcher Mike Passman who, long retired, has no intention of putting his hard-earned money at risk by investing in a stocks and shares Isa.
‘I will be 80 in August,’ says Mike, a former insurance broker, ‘while my good wife Anne will be 81 this month. Not exactly the time of our lives to be investing. For us, financial security is all-important and that means cash Isas.’
As I report later, there are more risk-averse people out there like Mike and Anne, from Thurlestone in south Devon, who view Isas through the spectrum of cash and capital certainty – not shares and capital uncertainty.
Sadly, savers like the Passmans will soon become second-class Isa citizens, permitted to use no more than a fraction of their £20,000 annual allowance (£4,000 is the word on the street) on cash Isas.
On the other hand, investors will become Isa ‘toffs’, allowed to continue making annual contributions of £20,000 into an array of funds and shares.
Rumours of such an Isa makeover have been bubbling under the surface – like a burst Thames Water sewage pipe – for the past month or so.
They have been fuelled by meetings held between Ms Reeves and City grandees to discuss ways of turbo-charging investment in UK plc at a time when the economy is reeling under the weight of last October’s tax-heavy Budget.
Although other investment measures have been discussed, such as the abolition of stamp duty on UK share purchases, a reform of Isas has been near the top of the agenda.
To begin with, it appeared that the Chancellor could go nuclear and remove the tax wrapper from cash Isas altogether, leaving savers’ interest payments on their cash balances subject to tax.
Understandably this provoked an angry response from the building society industry, which reminded Ms Reeves in an open letter that cash Isas were a ‘long-established cornerstone of the UK savings landscape that are well understood and upon which many people rely’.
It added that any drastic move to compromise cash Isas would inhibit the ability of building societies to provide finance to homebuyers.
Money Mail promptly launched its ‘Hands Off Our Cash Isas!’ campaign.
Ms Reeves has since changed tack. During a breakfast meeting last month with representatives from investment banks and asset managers, she ruled out scrapping cash Isas in favour of reducing the amount that can be saved into them every year.
By limiting the use of cash Isas, the Chancellor believes that some people will direct more of their Isa money into stocks and shares Isas, igniting the UK stock market and stimulating the economy in the process.
This is music to the ears of those investment companies which had a presence at the love-in – the likes of Aberdeen (Abrdn no more), BlackRock, Fidelity, JP Morgan and Schroders. All will be big beneficiaries of any refocusing of Isas on investing.
But it’s terrible news for those who weren’t represented, namely building societies – cornerstones of communities up and down the country – and, more importantly, a raft of people who are simply not prepared to take risks with their wealth for all kinds of reasons.
They include those diligently accumulating a pot of money to fund the purchase of their first home, and millions of people in later life (like the Passmans) who no longer want to take unnecessary risks with their retirement finances.
Government figures show that more than 18 million people have a cash Isa, with nearly half held by people with incomes of less than £20,000 a year.
It is believed that the annual cash Isa allowance could shrink to as little as £4,000 – and that an announcement about the change is likely to be made in the
coming weeks as part of a broader government initiative (the Financial Services Growth & Competitiveness Strategy) aimed at driving growth in key areas of the UK economy.
As our campaign indicates, Money Mail opposes any reduction in the ability of the young and old to shelter cash inside an Isa.
We believe people should be allowed to choose how they use their annual allowance to protect a slice of their wealth from the taxman.
Many Money Mail readers are comfortable using an Isa to invest in stocks and shares for the long term. Fine and dandy. But they are more than matched by those not prepared to park their money in anything but cash Isas.
Latest data from Paragon Bank indicates that the total cash Isa balance held by adults stands at £359 billion. These savers are often risk-averse, and the Government should not now discriminate against them by restricting how they can use cash Isas.
After all, many have already had their ability to shield savings interest from tax (outside of an Isa) compromised by a nine-year freezing of the annual personal savings allowance: £1,000 for basic-rate taxpayers, £500 for higher-rate taxpayers.
The feedback from consumer research, Money Mail readers and building society bosses indicates that Labour would be best advised to leave cash Isas well alone.
A survey by Nottingham Building Society indicates that a majority of savers (55 per cent) oppose any cut to the cash Isa allowance, with more than three quarters of over-55s objecting to such a move.
Yet it is not just the more mature among us who are up in arms. According to Nottingham’s research, more than four in ten 25-to-34-year-olds with cash Isas say a reduction in the allowance would inhibit their ability to build up a deposit for a home purchase.
It’s a view shared by the Intergenerational Foundation, a charity set up 14 years ago to promote fairness across all age groups.
Liz Emerson, co-founder of the charity, says that any tilting of the ‘playing field once again away from young people by forcing them to save in ways that will supposedly encourage a domestic growth agenda is yet again intergenerational unfairness in action’.
Yesterday, Robin Fieth, chief executive of the Building Societies Association, told Money Mail that it was a ‘myth’ that savings in cash Isas ‘are sitting dormant and not supporting the Government’s growth ambition’.
He said: ‘Cash Isas are a vital source of funding for building societies and underpin the mortgage market. As such, they represent a direct investment in the UK economy as well as helping the housing market to function effectively.’
Each housing transaction, he said, contributed between £10,000 and £16,000 to the UK’s economic growth: ‘It’s therefore baffling to understand why the Chancellor would want to risk making mortgage availability more difficult and expensive for first-time buyers and home movers.’
Money Mail readers are alarmed at the prospect of a reduced cash Isa allowance.
Jeannette Meyers, a 71-year-old widow from Ashford in Kent, has cash Isas with the likes of Kent Reliance, Lloyds and Nationwide – and uses as much of the annual allowance as she can afford.
‘My late husband worked for the Inland Revenue,’ says Jeannette, ‘and he always said he was determined that his employer would not be able to get its hands on our savings.
So, we saved in Tax-Exempt Special Savings Accounts [the precursor to cash Isas] when they were launched some 30 years ago and jumped on board the cash Isa train when they replaced Tessas in 1999.’
She describes cash Isas as a ‘vital component’ in the financial armoury of savers – young and old alike.
‘I use them to meet occasional household repairs or to supplement my income,’ she adds.
‘Equally, I have a young friend who is saving to buy a home with her husband. Much of that money is going into cash Isas. A reduction in the annual allowance would make that goal more difficult.’
Yesterday, Money Mail asked the Treasury specific questions about the reform of cash Isas:
Is an announcement likely to be made in the Chancellor’s spring statement on March 26 – or as part of the Government’s Financial Services Growth & Competitiveness Strategy, due to report at about the same time?
Will existing cash Isas remain intact? Or will the focus be on reducing the annual cash Isa allowance? Will any changes come into force from April 6 this year, or next?
Finally, does the Chancellor understand that if cash saving in an Isa is reduced, it will have repercussions on the ability of banks and building societies to provide funding for the mortgage market?
It responded with a comment from the Chancellor: ‘It’s really important that we support people to save, to achieve their aspirations.
'At the moment, there is a £20,000 [Isa] limit on what you can put into either cash or equities, but we want to get that balance right.
‘I do want to create more of a culture in the UK of retail investing, like what you have in the United States, to earn
better returns to savers and to support the ambition to grow the economy, creating good jobs right across the UK.’
Readers, please pause for a moment, take a deep breath and read those last two paragraphs again. Especially those seven key words: ‘We want to get that balance right.’
Those words only suggest one thing: Isa change is coming.
So, for those of you who view cash as king, fill your boots with cash Isas while you can, before the end of the tax year on April 5 – and then again in the new tax year.
Building society bosses back our campaign
Robin Feith: Chief exec Building Societies Association
‘We’re pleased that the Chancellor has confirmed that she is no longer considering scrapping cash Isas, but we urge her not to meddle with the savings limits on these accounts which are favoured by many Brits.
‘I’m puzzled to understand why there is an assumption that reducing the cash Isa limit will lead to a growth in UK investments.
‘Firstly, most people who have a cash Isa are not prepared to take a risk with their hard-earned savings, so it’s unlikely that a lower cash Isa limit will see any growth in the amount people will put into a stocks & shares Isa.
‘Secondly, only around £10 in every £100 invested in funds, including in stocks & shares Isas, are invested in UK companies. If the government wants to target capital for UK growth, perhaps a good starting point would be to look at how to reverse the increasing proportion of investments going overseas.
‘I fully appreciate that investing in stocks and shares will be an appropriate choice for individuals to help achieve their longer-term financial goals. But the focus should be on education, allowing individuals to make informed savings choices based on their needs and risk appetite, not restricting their choice.
‘We hope the Chancellor will offer us the same courtesy given to the investment and fund managers - and meet with us to hear the other side of this important debate.’
Stuart Haire: Chief exec, Skipton Group
‘I agree with the government’s ambition in wanting more people to have longer-term savings and investment plans in place. However, I do not agree that changes to cash Isas will help achieve this.
‘If the government’s logic is that in reducing the amount people can save into a cash Isa, then people’s appetite to risk will change and their access to advice and guidance will suddenly improve – then they are mistaken. This is the wrong medicine for the problem. What’s needed is a change in consumer behaviour that’s driven by savers having far better access to and confidence in financial advice.
‘There’s a financial advice gap in this country and consumer behaviour and attitude to risk will only change with support and guidance readily available to all.’
Paul Denton: Chief exec, Scottish Building Society
‘We believe the UK government should maintain and protect cash Isas rather than restrict them. Investing in stocks & shares Isas won’t be for everyone – indeed, many of our savers have told us they want to be able to access their money quickly and there are also some who do not have enough savings to put their money at risk.
‘We know from research recently published by the BSA that an overwhelming majority of cash Isa savers – 90 per cent - said it’s important to them that they get back at least the amount they have saved or invested.
That’s a guarantee that only comes with cash Isa savings. Placing restrictions on them runs the risk that savers might put their money into non-Isa accounts rather than stocks & shares Isas, which could increase people’s tax liability.
‘The money saved in cash Isas is far from dormant – it is used by building societies to fund mortgage lending.
That’s why any changes will undoubtedly have a ripple effect on mortgage customers, making it more expensive to borrow money. We know that young people in particular are struggling to get their foot on the property ladder and an increase to mortgage bills will only make this harder.
‘Supporting growth in the UK economy is in all our best interests, but this is complex and requires careful consideration. Safeguarding savings has implications far into the future.’
Chris Hunter: Chief exec, Darlington Building Society
‘The Isa market is of critical importance for the building society sector, in particular for regional based societies with a less diverse funding base.
‘Larger providers have access to broader wholesale market options which means they can access alternative funding to Isas.
‘Darlington is 100 per cent retail funded. This means we source all of our funding for our mortgage book from savings accounts.
‘Isas represent £365million – 40 per cent of our savings accounts. This effectively funds the mortgage market, in particular first-time buyers and home movers, fuelling the economy and providing a valuable source of tax revenue for HM Treasury through stamp duty.
‘Last year, we saw £110million pour into Isas. If the allowance dropped to £4000 a year, potentially up to £80million of retail savings inflows would be lost, which would have a profound impact on us being able to fund first time buyer mortgages.’
Lee Raybould: Group chief financial officer, Coventry Building Society
‘Restricting cash Isa is a fundamentally bad idea.
'It’s bad for the millions of savers who will keep saving their cash rather than take the higher risks of investing in shares - and pay more tax on their hard-earned savings as a result.
‘We urge the Chancellor to spend more time listening to savers as our members would soon tell her how deeply unpopular a change to cash Isas would be.’
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