Almost two-thirds (61%) of retail investors don’t want to see changes to ISA rules, a study from Rathbones found, which would scrap or restrict the annual allowance of cash ISAs.
Currently, adults can contribute up to £20,000 per year tax-free into ISAs and deposit all the money into cash ISAs, avoiding stocks and shares ISAs. Most recent Government data shows £41.627bn was deposited in cash ISAs in the 2022/23 tax year, while £28.012bn was invested in stocks and shares ISAs.
Documents from last week’s Spring Statement said: “The Government is looking at options for reforms to individual savings accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.”
Some industry experts have called on the Treasury to scrap cash ISAs entirely, while others have suggested cutting cash ISA annual contributions to £4,000 per year.
Rathbones’ research found just under one in five (19%) retail investors would invest more in the stock market as a result of changes to cash ISA rules, with 4% of those saying they would invest substantially more and a further 15% indicating they would only increase their investments slightly.
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Around 17% of those questioned said changes to cash ISA rules would have no impact on their investment in the stock market, while nearly one in 10 (9%) would reduce the amount they invest in the stock market. Nearly a third (32%) do not know what they would do, while 22% say any changes would not apply to them.
‘Not necessary to cut tax-free savings allowances’
Faye Church, chartered senior financial planner at Rathbones, said: “It’s not necessary to cut tax-free saving allowances to boost stock market investment. Those who are using cash ISAs are generally not choosing cash as an investment but as a stepping stone for something else.
“Cash ISAs can be used to hold monies that may be needed in the shorter term while also benefitting from tax-efficient interest – we find they are often popular with younger and mid-life clients looking to buy or move house, for instance.”
Church added: “It’s not a sensible option to invest short-term monies in the stock market due to market volatility; there is no guarantee that your initial capital will retain its value.
“If cash ISAs are being used as a more long-term solution, investors could see much stronger returns in the stock market compared with cash savings, but many may need support from wealth advisers before making the decision to switch.”
