The Government has confirmed it is looking at reforming ISAs, following weeks of speculation that the cash ISA could be cut or scrapped.
In the Spring Statement documents, the Government said future reforms will aim to “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.”
It added that, alongside this, it is working with the Financial Conduct Authority to “deliver a system of targeted support to give people the confidence to invest.”
It follows months of speculation that cash ISAs could see their current allowance of £20,000 cut to just £4,000 or even scrapped altogether.
City bosses are reported to have called on the Chancellor to cut the allowances to push more savers towards investing and boost the amount deposited in stocks & shares ISAs.
Michael Summersgill, chief executive of AJ Bell, said: “Despite holding off on reform today, the Government has confirmed change to the status quo is being considered ahead of the Budget later this year, with Labour having already committed to ISA simplification and encouraging greater use of stocks and shares ISAs during the general election campaign.”
However, he added: “Any restriction on the amount of cash held within ISAs would also run counter to Labour’s stated aim to simplify the ISA landscape.
“Rather than having a simple-to-understand £20,000 overall limit, people would have a limit within that limit and there would need to be complex restrictions on transfers from stocks and shares ISAs to cash ISAs to prevent people gaming the system.”
Here’s what it could mean for you.
An ISA (Individual Savings Account) allows you to put away up to £20,000 each year without paying tax on any gains you make.
There are four types of ISA you can take out – cash ISA, stocks and shares ISA, lifetime ISA and innovative finance ISA.
You can also open a Junior ISA to save or invest on behalf of your child.
A cash ISA, which is the one expected to be reformed by the Government, is essentially a savings account where you don’t need to pay tax on the interest.
How could it impact you?
Cash ISAs are extremely popular with over 18 million people having one.
Should it be cut or even removed, there would be a significant impact on savers hoping to boost to make the most of their tax-free wrapper.
Experts have warned that scrapping or limiting cash ISAs would be a blow to retirees.
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Ian Futcher, chartered financial planning consultant at Quilter, said: “If the rumours about scrapping or reforming cash ISAs prove true, it could significantly impact individuals who rely on these accounts for their retirement income.
“While it’s true that too much wealth in low-yielding cash can hinder long-term returns, cash ISAs still play a valuable role in financial planning.”
One of the biggest risks is that without cash ISAs, retirees could be forced into riskier investments, he said.
It could also have an impact on first-time buyers who rely on the product for their house deposit.
Emma Fildes, property adviser at Brick Weaver, said: “The issue with this is that cash ISAs help fund deposits for household loans.
“By taking these away without an alternative savings option could result in fewer people being able to save sufficient funds for a deposit.”
What do the experts think?
Jason Hollands, managing director of Bestinvest, said: “Confirmation arrived today that ISAs could be in line for a shake-up with a consultation that might end up changing the ISA landscape for cash savers.
“While it is undoubtedly true that too many people keep excess savings in cash and could be missing out on the higher long-term returns that can be achieved from investing, anything that reduces choice and flexibility is a step backward.
“For some people, investing will simply be too risky and so a reduction in cash ISA limits will just end up exposing more of their savings to tax in standard savings accounts – particularly with the personal savings allowance frozen and dwindling in real terms.”
Anne Fairweather, head of public policy and government affairs at Hargreaves Lansdown, added: “Refining the ISA framework should be aimed at simplifying choices and opening up investment opportunities.
“Dropping the ‘stocks and shares’ language and updating the ISA to call it an investment ISA would be a welcome victory for plain speaking.
“A review of the products which can be held within an ISA would also allow for the Government to consider how current investment trends can be supported.”
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