Getting Brits to invest will take more than tweaking ISAs
Rachel Reeves is considering reducing the tax-free limit on cash ISAs to encourage people to invest in stock and shares, but she should go even further, says Emma Revell
It is one of the most popular and best understood savings tools available for Brits, but there could be a big shake up coming for the humble ISA.
The Chancellor has indicated she may make changes to Cash Individual Savings Accounts in order to “get the balance right” between cash and equities – the problem being the overwhelming popularity of the former. The most likely change would be to dramatically reduce the tax free limit for cash ISAs to £4,000 – down from £20,000 – while, one assumes, protecting the higher limit for Stocks and Shares ISAs.
Such a move might be unpopular with the general public – the Daily Mail have already launched a “Hands Off Our Cash ISAs” campaign and the Building Societies Association warned it could restrict funds available for mortgage lending – but Morning Wire readers will likely agree that Rachel Reeves should encourage more people to move their savings out of cash. We in Britain have been unbelievably poor at communicating how damaging and counterproductive saving in cash actually is. Many people find the idea of investing too uncertain, preferring the perceived stability of keeping their savings in cash, and are unaware that this decision leads to significantly lower returns.
Back in 2023, the Centre for Policy Studies, the think tank I work at, published a report – supported by Personal Investment Management & Financial Advice Association (Pimfa) and endorsed by the then City Minister Andrew Griffith MP – which highlighted the scale of the problem.
A 2021 study by Barclays found that over the last 50 years, the average annual return for shares was six per cent. For cash, it was just one per cent
A 2021 study by Barclays found that over the last 50 years, the average annual return for shares was six per cent. For cash, it was just one per cent. The value of every penny saved in cash is being hammered by inflation. This decision also significantly exacerbates wealth inequalities because the poorest Brits are several times more likely to choose to keep their savings in cash.
We also fall way behind other nations when it comes to retail investing. UK-based retail investors have the lowest percentage of assets under management of any European nation – 21 per cent compared to 28 per cent in France, 30 per cent in Germany, 34 per cent in Italy and 84 per cent in Spain.
There are benefits to having more retail investors for companies too, a more diverse share register, a more stable share register and, perhaps most importantly, providing more opportunities to raise capital and increase liquidity. Imagine what capital could be made available if a fraction of our cash savings were moved into investments? Our 2023 report found that at that time, Brits had £1.8 trillion of cash in savings accounts – roughly equivalent to the entire market capitalisation of the FTSE 100 – and approximately £300m in NS&I accounts. If more money was to be invested in companies with a realistic prospect of growth then those companies would likely expand, make more money and invest more in future growth.
Tell Sid
Rachel Reeves would be right to nudge Brits towards investing by changing the ISA landscape but she also needs to make it easier.
The public at large find the idea of investing appealing, but daunting. Research recently reported in the Daily Mail found that 44 per cent of savers delayed investing because they felt they didn’t know enough about markets, with eight per cent waiting over a year to take the plunge.
And really, who can blame them? Investing has theoretically never been easier, you can deposit your money and set your risk level in any of a plethora of apps and platforms which will handle everything for you. To comply with risk-averse regulations though, any advert for these services must come with striking warnings about the dangers of losing money. Even if you wanted to take a traditional route, high street banks are discouraged even from suggesting to you that you might benefit from moving your savings into shares, or offering easy ways to do this.
The CPS’ suggestion in our 2023 report was to merge Cash ISAs and Stocks and Shares ISAs into a single product, that way savers could maintain savings in cash but would be made more aware of the potential long-run returns of stocks and shares. Reeves may prefer to lower the cap for cash but she shouldn’t stop there.
A public awareness campaign, along the lines of the iconic 1980s ‘Tell Sid’ campaign, supported by the government, regulators and the London Stock Exchange, would help demystify investing for the masses. Policymakers, including over-cautious regulators, should rethink the disclaimer requirements around retail investing to take a more realistic, positive attitude towards risk, with personal responsibility in investing embraced.
A tweak to a savings vehicle may have a significant impact on our attitude towards investment but it should by no means be the limit of our ambition.
Emma Revell is external affairs director at the Centre for Policy Studies