The Garrulous Jay – Crash ISA

The latest subject of fevered speculation in the personal finance press has been the Cash ISA. This has included rumours that, in an attempt to encourage an equity savings culture in the UK, the Chancellor is considering dropping the annual Cash ISA contribution to a maximum £4,000 from the current £20,000.

I think this would potentially have the exact opposite effect to the one the Treasury might be seeking to achieve.

The twisted logic being applied here is that by reducing the Cash ISA limit by £16,000 you will encourage savers to divert more funds into Stocks and Shares ISAs. By so doing, over time you will build a culture of stockmarket investing, thereby boosting the UK economy.

There is no doubt that the UK lags some other developed markets in terms of the amount individuals invest in stocks and shares. According to a recent report by Abrdn, individuals hold 8% of their personal wealth in equities and mutual funds, compared to 33% in the US.

It is easy to point the finger of blame partly at Cash ISAs and the associated tax incentives. According to the most recently available statistics, in 2022-23 £42 billion was subscribed to Cash ISAs compared to £28 billion into Stocks & Shares ISAs.

But I think the Cash ISA is part of the solution not part of the problem…

There has actually been a steady increase in Stocks & Shares ISA subscriptions over the past 14 years, with these exceeding Cash ISA subscriptions for the first time in 2021/22, before falling back a year later.

Part of the success of the ISA is the way it unifies both cash and stocks & shares under a single savings wrapper. This allows the Cash ISA to serve as a ‘gateway’ savings vehicle for those who may then graduate a Stocks & Shares ISA if or when appropriate.

Reintroducing different limits for the two products takes us halfway back to the old world of TESSAs and PEPs.

If I was looking for ways to encourage savers into the equity market I wouldn’t start by adding uncertainty to the ISA regime. I might instead look to the £128 billion currently tucked away in Premium Bonds. The fact that a couple can put £100,000 into these products, where the distribution of returns is both uncertain and skewed, seems perverse to me.

Even if the spurious assumption that the lower Cash ISA limit would see individuals redirecting more of their savings into Stocks & Shares ISAs proved correct, it is also questionable as to whether it would deliver the economic benefits being sought.

Much of that money would end up in international rather than UK equities, and many UK listed companies operate outside the UK. It should also be remembered that a pound invested in the shares of a company is not a pound actually invested in that company.

Ironically, more of the money placed on deposit in a UK bank probably ends up being invested in the UK economy through the bank’s lending activities, than funds invested in stocks & shares.

Tinkering with the Cash ISA would potentially have both unintended and unwanted consequences.