Cash Isas ‘below risk’ – ought to savers be compelled to speculate their cash as a substitute?

A call to make cash Isas less appealing has been branded as ‘questionable in intent’ by investment platform Trading 212.

In a meeting with the Rachel Reeves last week, some city bosses put pressure on the Chancellor to cut tax breaks for cash Isa savers.

Financial firms claim the £421billion held in cash Isas could be put to better use if savers instead held their money in investments

The suggestion by some finance firms is the Government should reduce the cash Isa allowance in order to push savers into investing their money instead. 

Currently, the allowance sits at £20,000 – and people can opt to put the full amount in a cash version, as well as a stocks and shares one.

The Chancellor did not dismiss the idea, according to a senior banker.

Gabriel May, of Trading 212, told This is Money: ‘The popularity and growth of the cash Isa have proven it to be a highly appealing financial product. 

‘It encourages saving by offering an attractive combination of a high interest rate, tax benefits, and flexible withdrawals. People voted for cash Isa with hundreds of billions of their savings.

‘Building a financial safety net – whether for unexpected expenses or major future purchases – is essential for everyone’s financial well-being. 

‘Our clients’ data demonstrates that cash Isa users are forming healthy saving habits and the product serves as an entry point into the broader Isa family, promoting long-term wealth accumulation.’

Trading 212 offers both cash Isas and stocks and shares Isas, as well as general investing accounts. 

While some have voiced concerns the tax benefits of cash Isas are preventing savers from choosing to invest their money instead, thus benefitting the UK’s economy, there is also a case to be made that cash Isas provide a significant boost to savings.

The higher rates offered by cash Isa products can help savers reach their goals more quickly and therefore increase their spending. This, in turn, provides its own benefits to the economy.

HMRC data from the 2022/2023 tax year indicates the average amount held in an Isa account is just over £16,000, below the annual allowance, which suggests that a cut to the tax benefits of these accounts is more likely to see savers move their money into regular savings accounts rather than commit the bulk of their savings to a stocks and shares Isa – something that many feel is too risky an option for them.

The vast majority of Isa holders do not make use of their full £20,000 annual allowance.

May added: ‘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.’

Currently consumers can save up to £20,000 per year tax-free in a cash Isa, with the allowance shared with stocks and shares Isas.

The accounts, launched by Gordon Brown in 1999, are the more popular of the two, with some £421billion held in cash Isas out of the total £726billion held in Isas in total. 

Innovative finance Isas and lifetime Isas are also available alongside stocks and shares Isas – but are far more niche. 

Isas saw a huge change in 2014 when then Chancellor George Osborne equalised the amount that could be split between cash Isas and stocks and shares Isas, giving people full control of where their tax-free money went. 

Before this, a maximum of half could be held in cash – while you could use the allowance to maximise the stocks and shares element.  

Louise Halliwell, group savings director, Kent Reliance, said: ‘Ultimately if you were to remove cash Isas you would be reducing customer choice. 

‘There are people for whom stocks and shares aren’t appropriate as well as those who don’t feel comfortable with the potential for loss of capital that comes with stocks and shares accounts.’

The typical advice given when investing is that you should be able to commit your money to the investments for at least a five-year period. 

For many using cash Isas though, this simply isn’t an option – instead, the accounts are used for short term savings goals.

Halliwell added: ‘Isas were introduced to encourage savings habits and are suitable for most people, hence their appeal. 

‘Whether you’re starting your savings journey or already have a lump sum, Isas enable those with modest amounts of savings to benefit from a tax efficient savings vehicle.

‘Unlike investments that carry risk, cash Isas guarantee that you’ll get back every penny you put in, plus the interest earned — making them a safe option for savers preparing for life’s unexpected expenses or planning short-term goals such as a holiday or wedding.’

A Treasury spokesman previously said: ‘We want to help people save for their future goals. We keep all aspects of savings policy under review.’

Isas need ‘simplifying’ argues AJ Bell

Meanwhile, investment platform AJ Bell is calling for Isa offerings to be improved, arguing that stocks and shares and cash Isas should be consolidated into a single tax wrapper that it says would help to encourage investment without reducing the options available to savers.

AJ Bell head of public policy, Rachel Vahey, said: ‘A piecemeal strategy has led us to a place where we have too many Isa products, too many rules and too much complexity. 

‘Simplification must be the over-arching focus of any government reforms, starting with merging cash and stocks and shares Isas.’

AJ Bell also said these changes should form part of a broader simplification of the Isa system.

The firm says lifetime Isas should also see their age restrictions removed, as well as a reduction in the early withdrawal charges to 20 per cent from the current 25 per cent.

Vahey added: ‘The flaws in its design mean the lifetimes Isa doesn’t work effectively as a retirement savings product. 

‘And it has left some savers angry when they face a government-sanctioned punitive exit penalty if their plans change unexpectedly, and they need to take their money out earlier than planned.’