Rachel Reeves sent huge cash ISA cut warning over £2.5bn Treasury losses

Rachel Reeves has been warned that reducing cash ISA limits would cost the Treasury billions of dollars and would not encourage people to invest.

The Building Society Association (BSA) says the damage caused by cutting cash ISA rates will lead to up to 60,000 fewer mortgages being offered on the property market, hindering the government’s own target of 1.5 million new homes over the course of parliament.

As a result, the BSA estimates that damaged economic growth and reduced tax revenues could cause a £2.5bn loss to the Treasury.

Over the summer, housebuilders including Nationwide and Skipton wrote to the chancellor pleading for cash ISAs to be left untouched.

Building societies are among those offering cash ISA products and using these deposits to support their ability to finance home mortgages. Reducing the amounts saved in these funds could impact the construction industry’s mortgage supply by 5 percent, according to BSA research. They tend to be particularly active in the first-time buyer market.

Dame Meg Hillier, chair of the Treasury select committee, said it was “not the right time to reduce the cash Isa limit”.

Currently the rules allow each person to save £20,000 per tax year across the current range of ISAs, which includes cash and investment versions as well as Lifetime ISAs. Speculation suggested that Ms Reeves could halve this in terms of how much could be saved in cash, with the remainder of the allowance then reinvested.

Earlier this year the Chancellor highlighted the huge difference between the potential returns of saving or investing £2,000, and while there may be doubts about the rates used in each case, the basic point remains: investing over long periods tends to produce better results than saving.

Meanwhile, results of a new survey show that more people are choosing to potentially pay taxes on their cash savings rather than start investing.

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The government has been clear that they want to create an investment culture in the UK, which has fewer retail investors (in other words, the general public) than other countries such as Germany, Sweden or the US.

But the chancellor’s plan to effectively funnel people into stocks and funds by cutting tax-free savings allowances has been widely criticized and most industry experts agree it is entirely unlikely to have the desired effect.

This perspective is now supported by new research showing that more people (26 per cent) are choosing to save extra money beyond their cash ISA limit in an ordinary, non-ISA savings account rather than investing it in a tax-free stocks and shares ISA (20 per cent).

One in ten (10 percent) say they would spend the money instead, while almost two in ten (18 percent) say they would not make any specific plans for the extra money; in both cases, potentially reducing the financial resilience of individuals or families.

The survey was conducted by Censuswide on behalf of personal finance comparison site. finderWith 2,000 adult participants.

Interestingly, 15 per cent said they would invest the money outside an ISA, while nine per cent said they did not know what cash ISAs were, while 9 per cent said they would invest the money outside an ISA – perhaps indicating that some had already maxed out their allowance or were unaware of the mechanisms for investing within an ISA.

Finally, 16 percent said they would invest the money in Premium Bonds, which pay rewards once a month but do not pay any interest; This means that much of the money in it is at risk of losing its purchasing value over time due to the effects of inflation, which currently stands at 3.8 percent.

George Sweeney, Finder’s investment expert, said: “It’s been met with a lot of backlash, but trying to encourage Brits to invest more and get better returns is a laudable endpoint that I agree with. But I don’t think cutting the cash ISA allowance will pave the way for that outcome.”

“A big reason for this is that many people do not feel confident enough about the prospect of investing. We found that just 1 in 5 Brits (20 per cent) are currently investing in the stock market. When asked why this was the case, the main reason was that a quarter (25 per cent) thought it was too risky.”

“Unfortunately, changing the ISA allowance will not lead to the necessary cultural and behavioral change that will lead to Brits investing more. Instead, we need better financial education for adults and the younger generation about the potential long-term benefits of investing.”

“The potential risks of gaming ISA allowances and rules make it far less likely that this change will have the outcome Reeves intended.”