Cash Isa limit cut may not encourage people to invest, finance expert says

A potential cut in the cash Isa limit in Wednesday’s Budget would not necessarily persuade people to move their money into investments, a finance expert has said.

The Financial Times has reported that the annual cash Isa limit could be reduced to £12,000.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “We need an investment culture in the UK, and some of the money that has been saved in cash Isas would work harder for people if it was invested instead, but there’s no evidence that cutting the cash Isa allowance would encourage them to make the change.

“There will be people for whom cash Isas are the most sensible home for their money, especially if they’re saving for the short-term, have significant sums of cash and are a higher earner.

“When (Hargreaves Lansdown) surveyed clients as to what they would do in the event of a cut, they were equally likely to say a cut in the allowance would mean saving elsewhere as they were to say they would invest instead.

“There will be those who should be investing instead, but the game changer here will be changes in the pipeline to allow businesses to provide more targeted support and give people the help they need to take advantage of the enormous growth potential of investment. It’s the carrot that’s going to be effective here: not the stick.”

In June, the Financial Conduct Authority (FCA) said it is aiming to reduce the “advice gap” – so that people have timely access to the help they need, at a cost they can afford, to make informed decisions about their financial lives.

The regulator has previously said that the advice gap is “stark”. Just 9% of adults received financial advice about their pensions or investments in the previous 12 months, according to the FCA’s Financial Lives survey 2024.

Ms Coles said that savings can act as a “gateway” to investing, adding: “It’s certainly something we see with our clients, so they begin by opening a cash Isa, and as they build their understanding of investments, they transfer this money into a stocks and shares Isa.

“The current system makes this straightforward, because there’s flexibility over transfers, so it’s easy to move from cash to stocks and shares and back again. If this change is introduced, the Government needs to focus on keeping journeys as simple as possible for clients.”

In October, the Treasury Committee urged the Government not to cut the cash Isa limit in the hope of persuading more people to invest in stocks and shares, saying such a move would be unlikely to incentivise savers.

The committee said the focus instead should be on improving financial literacy and enhancing access to good advice and guidance, so people can make informed decisions with their savings.

Rumours that the cash Isa limit could be reduced have been circulating for months, with various annual limits suggested to be under consideration.

It is understood several potential options have been mulled over.

Building societies have argued that cash Isa savings are a vital funding source for their mortgage lending. If Isa inflows fall, the cost of funding could rise, potentially making mortgages more expensive and harder to access, they have argued.

The current annual Isa limit is £20,000, of which all can be put into cash if savers wish.

According to HM Revenue and Customs (HMRC) figures released in September, around 15 million adult Isa accounts were subscribed to in 2023/24, up from 12.4 million in 2022/23.

Just under 10 million adult Isa accounts subscribed to in 2023/24 were cash Isas, marking a 2.1 million increase compared with 2023/24.

Around £103 billion was subscribed to adult Isas in 2023-24, an increase of £31.4 billion compared with 2022/23. The increase was driven by the rise in cash Isa subscriptions, which grew by £27.9 billion, HMRC said.

A recent freedom of information (FOI) request made to HMRC by InvestEngine found that the average of the top 25 stocks and shares Isa pots was worth around 17 times the average of the biggest cash Isa accounts.

The average value of the top 25 highest value stocks and shares Isas only was £10,980,000.

The average value of the top 25 highest value cash Isas only is £640,000, according to the figures, for the tax year 2022/23.

The HMRC document also said there were around 3,080 Isa accounts with a market value of £1 million-plus in 2022/23.

It counted 30 cash Isa accounts with £500,000-plus in them and 38,680 stocks and shares accounts containing at least £500,000 in the tax year 2022/23. The figures were rounded to the nearest 10.

Tom Selby, director of public policy at AJ Bell said: “Rather than rushing ahead with ill-thought-out Isa changes at this Budget, the Chancellor needs to step back from the precipice and gather evidence on the best way to reform Isas to support retail investors.

“There is no obvious benefit to investors, the economy or the Government from ploughing on with half-baked reforms that are unlikely to be effective and will be widely criticised by the industry and the general public.”

Gideon Salutin, a senior researcher at the Social Market Foundation said: “Our research has noted that the impact of cutting cash Isa limits is ambiguous.

“And while improving financial literary is useful, it will only go so far in addressing savers’ barriers to investing.

“Simplifying Isas lies at the heart of the solution.”