Shrewd parents extol upon their children the importance of stashing away some cash. Unfortunately, they rarely offer much guidance on what to actually do with that money. As a result, much of it gets squirrelled away in pink, ceramic pigs where inflation eats it up.
Many adults make the same mistake as these young savers. The more savvy ones opt to invest, perhaps in an Individual Savings Account (or ISAs), which are tax free savings accounts that let you save up to £20,000 every year, usually in the form of cash or stocks and shares. But it’s widely reported that the Treasury is considering a radical shake up of the market by lowering the amount savers are allowed to deposit in cash.
We Brits tend to opt for the cash ISA. Some 31 per cent of us have one – a whole lot more than the 16 per cent who use the stocks and shares variant – and we commit a lot of money to them. In March alone, £4.2 billion was stashed away, up 31 per cent from the year before.
The problem with this is that it’s widely believed we’d mostly be better off opting for the alternative. Leave the money long enough and stocks and shares generate a better return by riding out the bad times into the good, whereas cash rises at a fixed and predictable rate but fails to benefit from any magic the market brings.
It’s also believed that if the government is going to spend £8-9 billion a year subsidising tax free savings, it might be more worthwhile if more of that money went into British companies rather than being ported over to other parts of the world that generate better returns. Indeed, all this appears to be believed so strongly that the government is actually set to do something about it.
Plans currently being put forward include anything from merging all the different ISAs into one, to sharply reducing the amount of money you can keep in cash to just £5,000 in the hopes that the rest of it will be put into stocks and shares.
The important question of course is will it actually work?
Some of the large fund managers certainly seem to think so. They argue that re-orienting ISAs towards UK equities will encourage an investment culture while also giving our ailing equity markets a much-needed boost.
But should we be so sure? Others are rightly more pessimistic. AJ Bell points out that only one in five people would invest more in the UK stock market if the cash ISA allowance was reduced or abolished. Fear not, however, because fortuitously another idea doing the rounds is simply to require them to by also limiting the amount that could be invested in overseas stocks and shares.
If the everyday saver might not win, who could? The Treasury, probably
But what if savers simply won’t partake? The whole reason many consumers opt for their Cash ISA is because they either don’t consider themselves to be competent investors – accounting for some 22 per cent of Cash ISA users according to the Investment Association – or approaching old age means the time horizons they’re operating on result in fear about losing money.
Restricting the ability to access tax free savings seems entirely unlikely to win over the over 50 per cent of Boomers who hold Cash ISAs – but no other investment product – who feel that no amount of savings would make them feel comfortable investing. Instead, it’s entirely possible that this money stacks up in easy access savings account earning derisory rates that may as well be zero.
So, if the everyday saver might not win, who could? The Treasury, probably. If people across the country put less money into ISAs because they don’t wish to brave the stock market, then those savvy enough to get good rates will be obliged to pay tax on their savings as the personal savings allowance – the amount of money you can earn in interest before paying tax – gets increasingly inflated away. Already tens of thousands face hefty HMRC fines as higher interest rates push them over the personal tax allowance and the automated tax process doesn’t work because the government can’t match about one in five bank accounts with a taxpayer record. Of course, the Treasury would also save money on subsidising ISAs in the first place.
Banks would probably also be in line for a boost as people leave cash in easy access savers or worse their current accounts.
In any event, it seems like we’ll find out in due course. Whatever the government decides to do with the results of its forthcoming consultation, the increasing momentum behind calls for change means we’ll likely get some and it will probably be announced at the Autumn Budget. Undoubtedly, given the popularity of Britain’s beloved Cash ISA, someone at the Treasury will anxiously scrutinise whatever comes in knowing full well the ire of savers that awaits them if they get it wrong.
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