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Is it time to scrap the Cash ISA? Experts' view on Rachel Reeves' controversial plan to get UK investing
The Independent Money channel is brought to you by Trading 212.
One of the biggest talking points this year has been the UK's Cash Isa and what alterations Rachel Reeves may make to it. Early suggestions included removing it entirely, but more recent news has suggested a cap on the amount which can be saved, which is currently set at £20,000 per person per tax year (across all Isa types).
For the uninitiated, saving money within an Isa makes it exempt from tax on interest earned. It is estimated that around £300bn in total sits in Cash Isas, which some have suggested could be put to better use were it invested, for example in a Stocks and Shares Isa. While it's true that over the long term this can generate better returns than cash, this approach doesn't factor in how or when people may need to access their cash. This has led to widespread debate among City executives, politicians and beyond about potential reform.
But what about the people who use them? To get a broad representation of how a range of people use, or could in future use, a cash Isa, The Independent has spoken to a professional trading platform, a wealth management company for high net worth individuals, a money coach, a female money platform and one of our own money writers.
The reasonings and insight each gave for different areas of society were varied, but the overarching message was clear: The cash ISA must remain and is an important part of UK society's wealth-building.
And, even if a reduction in allowance won't hurt everybody, there's absolutely no guarantee it would have the seeming desired effect of pushing individuals towards investing instead - at least, not without far more guidance, education and understanding. And, let's be clear: that's exactly what these newly launched Independent Money pages are intended to bring for people.
When it comes to building an investing culture throughout the population, the UK has a long way to go.
But in savings, while people know how and why to do it, there also remains a wide gap in the ability of some families to do so, with a Yahoo Finance report last year showing 12 per cent of low income families have under £100 in savings.
A crucial stepping stone
Even so, with cash Isas being shielded from tax and an ideal location for anybody to contribute to, there's still a big role for them to play whether for those starting out on savings journeys or for those who have a bigger pile built up - especially, as Wealth Coach Sara Jane Maxwell notes, if they are not yet ready to move into investing.
'A cash Isa is a great tool. It works really well for people who are nervous or unsure about time horizons or don't want to venture into investments yet,' she told The Independent. 'I feel like it will be reduced, possibly not withdrawn altogether, because the government wants us to be investing rather than holding cash.
'When people come to me they usually have a cash Isa already but might not be utilising it to the full potential. I don't work with lots of people with huge balances in them, so the annual limit being reduced wouldnt impact a tremendous amount - but sometimes they might feel that being in an Isa [rather than regular savings account] puts their money at risk - so the more awareness of them, the more we make people have more interest in them, is a positive.'
The Independent 's money writer Marc Shoffman agrees on cash Isa being a stepping stone towards future investing potential - and says branding is an important part of overall awareness on the subject which may be better served changing rather than some of the sweeping and, at times, complicated reforms which have been suggested elsewhere.
'People are naturally and understandably cautious about investing. Having personal finance education in school would help so that children build an understanding of how to generate wealth beyond how Hollywood or TV shows depict it.
'Getting people to save is hard enough so having a cash Isa provides a comfortable starting point and the products play a key role of putting money away for short term goals. Scrapping cash Isas isn't a good idea as there is no guarantee that the money would automatically go into backing British stocks, which appears to be the Treasury's aim.
'Better education and maybe a rebranding stocks and shares Isas to an 'investment Isa' would be a start in making this area more appealing.'
The saving-investing knowledge gap
That latter point on City execs and politicians seeming to think people will automatically divert more money towards investing is an important one, and a recurring theme.
If people aren't already investing, there are reasons behind that - fear, knowledge, misunderstanding, timeframes, personal preference and risk appetite are all just some of the factors at play. It simply won't follow that being allowed to save less in one tax-free environment means the remainder will straight away be sent into shares, British or otherwise.
Saving and investing platform Trading 212 's Head of Treasury, Gabriel May, explained that trying to time-lock using a cash Isa will simply see a change of location, not of mindset.
'People should be free to decide how they save. Forcing them to shift from cash savings to riskier products by undermining the Cash Isa is not only unrealistic but also questionable in intent. If this option is removed, people will simply move their money to less beneficial savings accounts, ultimately reducing their returns,' he said.
Laura Pomfret, of female money platform Financielle, adds further context around that knowledge gap.
Many people might have an idea of what they want to achieve in money terms, but be 'overwhelmed' about how to start, let alone get there.
'They come when they feel overwhelmed in their money journey,' Ms Pomfret says. 'It might be consumer debt, wanting to own a home, a large expense on the horizon. They usually have a financial goal in mind and not know how to get there.'
Jumping straight into investing, then, isn't an ideal approach for many, even if they have started saving already.
Entry point and wealth building
The idea of savings being the only part of a person's, or a family's, wealth is a risky one over the long-term perhaps. But it's absolutely the most important one initially, and only once that is in place can they reasonably be looking further ahead at other products, other ways of looking after their futures.
'We start clients at the beginning: work to a budget which they then manage,' Ms Promfret explains. 'Is there an excess at the end of the month? If not, it's debt, overspending, credit lines. After sorting that, the very first thing we recommend is building an emergency fund, then stronger savings.
'It builds after that.'
Cash Isas clearly have to remain available, but also accessible - even if people cannot fill out £20,000 or close to that a year, restricting what they can put in - without regard for family circumstance or size, or even stage of life, might simply prove restrictive for the long haul.
Trading 212 's Mr May said: "It's a highly appealing financial product. It encourages saving by offering an attractive combination of a high interest rate, tax benefits, and flexible withdrawals. Building a financial safety net is essential for everyone's financial well-being. Our clients' data demonstrates that the product serves as an entry point into the broader Isa family, promoting long-term wealth accumulation.'
Steve Jordan, director and co-founder at Five Wealth, said that while many clients grow more wealth through shares investments, he was 'strongly against' any removal of the cash Isa and pointed out the demographic who would be most at risk, were they somewhat backed into a corner where investments was their only tax-free approach available.
'A large proportion of the population only have cash savings and don't receive any financial planning advice,' he told The Independent. 'Low-risk savers and pensioners would potentially be disproportionately affected; the result for these people could be forcing them into paying more tax on their cash savings or forcing them into capital-at-risk investments that may not be suitable.
'Savers without much investment knowledge could make the move without the benefit of advice and could be unprepared for the volatility that may affect them.'
It also shouldn't be just about moving from cash to stocks and shares Isas either, Mr Jordan notes, with Junior and Lifetime Isas being alternatives too.
'What about the Jisa and Lisa? These investments can have a timescale which is much shorter than that needed for investment. Shares may not be appropriate at all for people saving for a house or money that may be needed at 18. I agree that longer term excess savings are probably better invested in markets than in cash on a return point of view, but that's not always the only consideration,' he said.
And yet, perhaps it won't be as dramatic as it all sounds.
Perhaps political inertia will again reign supreme, as Ms Pomfret suggests - and actually, discussion around limiting something that some people don't already use might just encourage them to find out about it and get started.
'It will at least get press and attention. I don't think Ms Reeves will reduce it so much in the end - it'll be the usual approach of say something and then the end result is not as bad.'
Whatever the eventual outcome for the cash Isa, it's clear that for long-term wealth building, saving remains the start of the journey and a critical step, even if longer-term, more people should certainly be looking to begin investing.
When investing, your capital is at risk and you may get back less than invested. Past performance doesn't guarantee future results.
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