Voters won’t want to thank Rachel Reeves if the Office for Budgetary Responsibility (OBR) turns out to be right in its forecast for zero real growth in earnings in 2026 and 2027. But static earnings could turn out to be the least of problems for households. They will take an even dimmer view of the Chancellor if they wake up to find half their savings have evaporated. But that is what may well happen if, as Treasury documents suggest, Individual Savings Accounts – or ISAs – are reformed in the next Budget to discourage people from holding cash and encourage them to stuff their savings into the stock market instead.
We know that novices to the stock market are not necessarily going to behave wisely
Reeves won’t want to hear herself compared with Nigel Lawson, whose portrait she removed from No. 11, but in one sense she shares his views: she sees the point of ISAs as being to try to boost the UK stock market. ISAs can trace their lineage to the Personal Equity Plans (PEPs) introduced by Lawson in his 1986 Budget. These allowed savers to invest up to £2,400 in unit trusts, which themselves invested in UK-listed shares – with dividends free of income tax and the shares themselves free of capital gains tax.
It was, in a popular expression of the time, ‘popular capitalism’. While the privatisation of British Telecom, BP and so on had encouraged people to buy shares, many of those buyers quickly scooped their profits and spent them. PEPs were a way of encouraging long-term investment in the stock market, to make capitalists of us all – and giving large numbers of us a stake in UK plc.
Over the years, however, the rules were relaxed. From 1992, you could invest up to £3,000 in a single company as well as £6,000 in a collective investment. In 1999, Gordon Brown replaced PEPs with ISAs, which gave far more freedom: you could now invest in whatever shares you wanted, listed anywhere in the world. There was a cash ISA, too, which at first allowed limited sums to be invested in cash. George Osborne, though, lifted the ISA allowance to £20,000 and allowed all of it to be held in cash if that was what people wanted.
The City, however, doesn’t like cash ISAs. It has been lobbying Reeves hard to have the cash ISA limit cut so as to encourage investment in the stock market, and possibly only the UK stock market – i.e. back to the original purpose of PEPs.
And it seems as if Reeves and the Treasury are bending towards their demands. Documents accompanying the Spring Statement speak of wanting to ‘get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission’. In other words, we are about to be cajoled into using our savings in order to try to reverse what have been a lamentable few years for UK shares.
But therein lies the problem. What if the lousy performance of many UK shares continues, in spite of ISA reforms, and savers start to lose money? Over the long term, we are forever being told, shares outperform cash. But that is of little consolation when you wake up to find that a share you hold has just plummeted 40 per cent – which is not an uncommon experience, as I can attest, having had my breakfast ruined on many occasions.
If you stick to collective investments like unit trusts or investment trusts, or if you hold a well-diversified portfolio of shares, you don’t need to worry too much about the odd share plunging in value, often without any obvious reason. Yet we know that novices to the stock market are not necessarily going to behave wisely. Many are likely to pile into a single share that they have heard tipped somewhere, and which has already shown impressive gains. Then it plunges faster than it rises and the latecomers lose their shirts.
It is not just outrageously speculative investments which have a tendency to do this. The UK stock indices are littered with the shares of good, solid companies – especially smaller ones – whose shares have been pummelled over the past three years for little obvious reason and are down 70, 80, 90 per cent in spite of their continuing to make profits.
The political problem for Reeves, should she go ahead and restrict ISAs to shares, or even UK-listed shares, is that rather too many voters will end up losing money. Lawson found the same. The first year of PEPs was a time of fantastic returns. Then came Black Monday in 1987 when popular capitalism became a lot less popular over the course of a few hours. Reeves may end up wishing she had left the masses to enjoy their plodding returns in cash ISA accounts.
Comments