Force ISA savers to invest more in UK equities, Peel Hunt says
ISA rules should be rewritten to force savers to invest into UK equities, a leading City investment bank has argued, claiming the move would be vital to rejuvenate London’s ailing capital markets.
The cap on cash ISAs should be slashed from £20k to £5k to promote a transfer of savings into shares, according to a new report by Peel Hunt seen by Morning Wire, while a “home bias” rule should mandate a minimum 50 per cent exposure to UK equities in stocks and shares ISAs.
The current ISA regime, which is used by millions of British savers, is thought to cost as much as £9.4bn to the UK exchequer in the form of tax reliefs, a sum which Charles Hall, head of research at Peel Hunt, said was a “very poorly directed subsidy.”
“I think it’s lovely I get a tax benefit for putting money in my ISA and then investing it in US shares [but] I think it’s totally wrong that I do,” Hall told Morning Wire.
“It doesn’t make any sense, particularly at a time when our resources are limited.
“So I think there is a rationale for saying: we want people to save, but we want you to save in things that are actually helping the UK economy for our taxpayers’ money.”
The proposals come as the government explores reforms to ISAs, which were first introduced in the UK in the late 1990s. The reforms are expected to include a drop in the cash ISA allowance and the end of the seldom-used Innovative Finance ISA. But so far the Treasury has demurred over plans for a so-called ‘British ISA’, first mooted last year by then-chancellor Jeremy Hunt, to encourage investment into the UK.
The Peel Hunt research suggested the 50% home bias requirement would guarantee a £15bn minimum combined ISA investment into the UK per annum, a sum which could more-than offset the roughly £8bn annual outflows from UK equity funds. British retail investors allocated as little as 11.5 per cent of portfolios into UK equities in 2023.
Hall said a greater investment into UK equities via ISAs would “change the dial enormously” and “improve the UK capital markets.”
“We’ve been through a long period where the UK equity market has underperformed [but] a lot of that is due to capital flows; it’s not actually due to the performance of UK companies,” he said.
“So if we started to have capital flowing into the UK market, we’ll then get a folding in effect where more international money will come in.
“You’re making a more vibrant listed market in the UK, and that means we will then have more IPOs in the UK and you get a circular benefit, which is good for everyone in the UK economy.”
Chancellor Rachel Reeves said: “It’s really important that we support people to save, to achieve their aspirations.
“At the moment, there is a £20,000 limit on what you can put into either cash or equities, but we want to get that balance right.
“I do want to create a more of a culture in the UK of retail investing, like what you have in the United States to earn better returns to savers and to support the ambition to grow the economy, creating good jobs right across the UK.”