Our savings are lazy – the Budget must put them to work
Rachel Reeves should cut the cash ISA limit and redirect savings into British equities, says Steven Fine
The old saying in finance is that “money never sleeps”: but a lot of ours is lazy. Today Britain sits on nearly a trillion pounds of ISA savings, yet too little is being put to work in our economy. What began as a policy to help connect a broad base of savers with British enterprise a quarter of a century ago has badly lost its way. That needs to change in the looming Budget.
Cast your minds back to 1999 if you can. When Gordon Brown introduced the ISA, the goal was simple: open up investment more widely, channel household savings into shares, bonds and funds that would drive growth, jobs and productivity. Savers could put all of the original £7,000 allowance in stocks and shares if they wanted to, compared to just £3,000 in cash. But today, with a cash limit of £20,000, cash ISAs hold around £440bn. Last year, adults put £103bn into ISAs: £70bn in cash, £31bn in equities. Of 15m adult ISA accounts, only 4m chose equities. As a nation, we hand out more than £9bn of tax breaks per annum, but much of that supports idle cash rather than investment.
Last year, adults put £103bn into ISAs: £70bn in cash, £31bn in equities
So it is time to restore the original purpose of ISAs and be true to the original vision. Cutting the cash ISA limit to £10,000 is sensible when two thirds of savers never reach that limit, and half of the amount invested in stocks and shares should go into UK-listed companies. This isn’t unheard of or somehow protectionist: it would simply echo the old Personal Equity Plans from the Nigel Lawson days even further back in the 1980s, which mandated 75 per cent domestic investment. This would help revive demand for British shares and rebuild confidence in public markets.
None of this would prevent investors transacting in overseas markets: just let’s not give them tax breaks to do it. The way we currently divert funds away from the UK puts up the cost of capital for our companies and impacts valuations. It’s one reason why we’ve seen a drip-drip of listed companies heading elsewhere. Redirecting domestic savings into UK equities would help correct that imbalance and encourage companies to invest in innovation, people and productivity. It would also help address the chronic underinvestment in domestic shares by UK funds compared to other countries.Cut the cash ISAs are tax-efficient, but what good is that if the benefits increasingly support companies listed overseas?
Common sense
It is only common sense for a government-backed tax relief to focus on growing the domestic economy. Every pound should fund innovation, jobs and competition in Britain. We live in a fiercely competitive world, which begs the question: why are our pension funds playing the global altruists, and supporting companies elsewhere? The Tesco employee paying into their pension sees 70 per cent of the equity portion heading to the US market, where one of the biggest stocks in the S&P is Walmart. The same goes for the Rolls-Royce employee’s pension supporting GE, or the Glaxo employee’s nest-egg heading towards Pfizer.
The naysayers argue that cutting cash ISA limits would impact mortgage lending. That argument doesn’t hold water either. For example, if you go back to 2017-18, when the cash limit increased to the current £20,000, mortgage lending flatlined. Mortgage demand is driven by interest rates, housing affordability and buyer confidence, not the precise size of cash ISA caps. In any case any shortfall in ISA deposits would likely be offset by savings flowing into alternative accounts. Maintaining artificially high cash ISA limits serves the interests of building societies, not the broader economy.
Reforming ISAs is not nostalgia or protectionism. It is past time we did something about this when UK companies employ millions, pay billions in tax and underpin regional prosperity. Every pound flowing into a UK company through an ISA would support those worthy ends.
Steven Fine is CEO of investment bank Peel Hunt