Rachel Reeves has set a ‘stick of dynamite’ under our Cash ISAs – and won’t stop there

Rachel Reeves, a prominent figure, is currently focusing on Cash ISAs, and there’s a possibility her attention might extend further. Millions of savers are anxiously waiting for her Spring Statement on March 26, where she will reveal her plans regarding the popular tax-free ISA savings allowance.

The big question is whether she will reduce the maximum amount that can be invested in Cash ISAs from the current £20,000 to £10,000, or perhaps even lower it to £5,000. There’s also speculation about whether she might cut the overall ISA allowance, which would affect those who invest in Stocks and Shares ISAs as well. As of now, her plans remain unclear.

ISAs have been incredibly successful since their introduction in 1999 by former Labour Chancellor Gordon Brown. Last year, they celebrated their 25th anniversary, with statistics showing that Britons have saved an astonishing £750 billion in these accounts. This includes approximately £456 billion in Stocks and Shares ISAs and £285 billion in Cash ISAs, with an additional £9 billion in Junior ISAs for children. The money in these accounts is exempt from income tax, dividend tax, and capital gains tax for life.

Over 22 million Britons hold ISAs, with the average person saving around £30,000, and those over 65 having an average of £58,787. While savers love ISAs, the Treasury does not share the same enthusiasm. The tax breaks associated with ISAs cost the Treasury nearly £7 billion annually in lost tax revenue, a figure that continues to grow each year. As a result, the Treasury is eager to recover some of these losses.

Investment fund managers in the City are also showing interest in ISAs. They are urging Reeves to reduce the tax benefits of Cash ISAs to encourage savers to invest in Stocks and Shares ISAs instead. They argue that this could potentially offer better returns to savers and stimulate economic growth by directing funds into British businesses.

However, Carol Knight, CEO of The Investing and Saving Alliance, warns that such a move could disadvantage savers, particularly those who are new to saving or are in their later years. Jason Hollands, managing director of Evelyn Partners, suggests that targeting Cash ISAs could damage Reeves’ reputation, likening it to igniting a stick of dynamite under the already volatile public opinion.

Hollands speculates that Reeves might still reduce the maximum contribution to Cash ISAs from £20,000 to £10,000 annually, which wouldn’t affect most savers but could encourage more investment in shares. There’s also the possibility that Reeves could restrict tax breaks on Stocks and Shares ISAs to those investing solely in UK shares or impose a lifetime limit on ISA savings. Torsten Bell, the newly appointed Labour Pensions Minister, has proposed a £100,000 cap, which he believes could save the Treasury over £1 billion annually. Reeves herself has previously suggested a higher lifetime limit of £500,000 in a 2016 article.

Another potential strategy for Labour could be to halve the annual £20,000 ISA allowance, a move that would primarily affect the wealthiest 7% of savers who can afford to invest the maximum amount. Reeves has already taken a step in this direction by freezing the £20,000 limit until 2030, which will diminish its real value due to inflation. Given the current financial constraints, she might consider further reductions.

Additionally, there’s talk of abolishing the Lifetime ISA (LISA), which offers younger savers a bonus of up to £1,000 annually. While attacking Cash ISAs seems the most probable action, it would likely be the most unpopular, potentially backfiring on Reeves. This situation could prove to be a significant challenge for her, and it wouldn’t be the first time such a move has caused controversy.