Chancellor John Healey has scrapped plans to slash the annual cash ISA allowance and revealed plans for a new ‘starter’ ISA.
Speaking at his first Budget today (28 October), Healey confirmed the cash ISA allowance will stay at £20,000 instead of falling to £12,000, as announced by the former chancellor Rachel Reeves at the budget last year.
He also said the treasury will work with the private sector to create a new starter ISA to reward first time investors.
However, Greg B Davies, chief behavioural scientist at Oxford Risk, warned that scrapping the cash ISA cut won't undo decisions already made in anticipation.
“The irony is that a policy intended to get people out of cash may actually have encouraged some to put more money into it before the rules changed.”
He added: “The fundamental flaw was always behavioural. People don't hold excess cash simply because of a tax break. They do it because cash feels safe, investing feels scary, and they're worried about getting it wrong. Removing a tax incentive doesn't remove those emotional barriers. You can't turn nervous savers into confident investors just by making cash less attractive.”
Stuart Dodson, CEO at True Potential Wealth Management, believes Healey was right to jettison the plans.
“The proposed Cash ISA savings cap was at direct odds with the goal of getting people to save for their future and the Chancellor has made the right call to scrap it.
“Had the proposal gone ahead, there was no guarantee that savers would have redirected their money into investments. Many instead would have opted for high-interest savings accounts or simply held the funds elsewhere, doing little to advance the government's ambition to get more people investing.”
Dodson added that the focus should be on financial education, helping people understand which option is most appropriate for their saving and investing needs.
“The Chancellor and industry should focus on building a nation of confident savers and investors, equipped with the knowledge to plan for their financial futures.”
Kevin Brown, savings specialist at Scottish Friendly, said it is “surprising, and hugely disappointing that the Chancellor has abandoned the planned reduction in the cash ISA allowance”.
“We supported that change as a step towards encouraging more people to consider investing and building better financial resilience across households in the UK,” he said.
“By reversing plans this afternoon, the government will have to answer the lingering question of how it will now deliver the investing culture it wants to create.
“We now hope the government will explain how it will help give people the confidence to consider investing. Keeping the allowance unchanged does little on its own to address the barriers that prevent people from taking that first step.”
Steven Levin, chief executive of Quilter, welcomed the U-turn but voiced concerns about the introduction of a new starter ISA.
“Stepping back from one unnecessary complication only to introduce a Starter ISA risks replacing it with another. We do not need more types of ISA. For most adults, a Cash ISA and a flexible Stocks and Shares ISA should be capable of meeting their needs, alongside Junior ISAs for under-18s,” he said.
“Creating another ISA means another set of rules for customers to understand and another product for providers to build and administer. It could also mean customers having to convert from a Starter ISA into a full Stocks and Shares ISA later. That adds complexity, cost and administration for little obvious benefit.
He added: “Helping people take their first steps into investing is absolutely the right objective, and there may be a case for stronger incentives to do so. But those incentives should work through the existing ISA framework rather than require the creation of another product. Every new ISA label risks diluting the simplicity that is one of the great strengths of the ISA brand.”
