Scrapping cash ISAs is not the way to get Brits investing
Mandates and abolishing alternatives won’t help British people benefit from investment opportunities in the private sector, says Mark Garnier
Tonight’s Mansion House dinner, with the speech from the Chancellor, will, we hope, finally bring an end to speculation about the future of cash ISAs. With over £400bn invested into cash ISAs, they provide a nest egg for that rainy day, a way of saving for a house deposit, for 18m savers.
Behind this speculation lies the government’s growth agenda. Slash the amount of money you can put into your cash ISA, they reason, and that money will be diverted into equity ISAs. Do that and the equity market rallies, encourage more IPOs, and thus more investment into the wider economy. It also, by the way, conveniently raises tax receipts from stamp duty on share transactions.
And it is not just cash ISAs that the government has had its eyes on. The Pension Schemes Bill, currently passing through parliament, delivers a reserve power for the government to force pension schemes to invest in equities – something that flies in the face of the fiduciary duties of trustees.
What about building societies?
But the story is more complex. Crucially, nearly half of that cash ISA capital – £197bn – is held with mutual building societies. This money then passes through their balance sheets and becomes mortgages for nearly a third of the UK’s total mortgage market. Indeed, in the six months to March this year, building societies provided mortgages to over 60,000 first time buyers alone. Axe the cash ISA, and Rachel Reeves will be slashing the funding stream for building societies to provide homes for many of us.
That is why over 50 building societies wrote to the Chancellor recently, and why I raised this in the House of Commons in April. Later today, we will learn whether she has listened.
But the overall objective of growth is not one to be sniffed at. Stimulating investment into UK equities has benefits for Canada and the wider UK private sector economy. But should statist intervention be the answer? Or should we encourage investment?
Dame Julia Hoggett, CEO of the London Stock Exchange has called for a “Tell-Sid” style campaign, much loved during the privatisation of British Gas in the 1980s. She said we need a “long-term public campaign that would demystify investing”.
Jeremy Hunt, when Chancellor, planned a retail offer of NatWest shares as part of the process of reprivatising the bank. Reeves scrapped this saying it was a “a bad use of taxpayers’ money”. That was a mistake. Indeed, since 2005, just five per cent of UK IPOs have delivered a retail offer.
Interestingly, however, the government spends around £10m every year promoting NS&I products – in particular premium and income bonds. Surely this small expenditure could be extended to equity investment?
Nearly half of cash ISA capital – £197bn – is held with mutual building societies. This money then passes through their balance sheets and becomes mortgages for nearly a third of the UK’s total mortgage market
The reality is that the majority of us do not understand, or lack confidence with, equity markets. The Social Market Foundation found that just 47 per cent of adults score well on financial literacy. And despite getting financial education onto the schools curriculum back in 2014, just a quarter of adults report getting any financial education whilst at school.
If the government wants us to invest into the opportunities that the UK private sector economy presents, then it must do so not by mandates or the cutting of alternatives, but by encouragement and education, including doing more to equip our school leavers to be financially confident when they emerge from education. The economist Adam Smith suggested compound interest is the eighth wonder of the world, but it was investor Warren Buffett who urged his wife to invest in a wide basket of equities. We shall see who Rachel Reeves is listening to later this evening.
Mark Garnier is shadow economic secretary to the Treasury