The Government is set to press ahead with an overhaul to cash ISAs despite concerns over pushing people towards riskier investments at a time of turbulence in the stock markets.
The Treasury is considering limiting the amount that savers can put in their tax-free accounts each year, with a decision expected later this year.
Economists warned this week that in the light of markets turmoil, it may be unwise to try and encourage savers to put their money into stocks and shares ISAs instead of cash.
Conservative shadow minister Mark Garnier asked Treasury ministers on Tuesday whether they were worried about the effect that limiting cash ISAs might have on building societies, which use the cash invested with them to lend out for mortgages.
In response Emma Reynolds, the Economic Secretary to the Treasury, said it was “jumping the gun” to assume that money would be removed from building societies and other mutual organisations.
But she defended the decision to press ahead with ISA reforms, saying: “We are considering options to reform ISAs, but we need to get the balance right between cash and equities.
“We know that there are many people who have investment in cash ISAs who could think about possibly investing in our capital markets – that would be a win for them in terms of higher returns, but also for the economy. But we absolutely understand the role that cash savings have for people for a rainy day.”
The Treasury is understood to have ruled out scrapping cash ISAs altogether, which would have removed the only mechanism for people to put their money in a risk-free investment without paying tax on the returns.
But one option on the table is limiting the existing annual limit of £20,000 for cash ISAs, perhaps to £4,000, while keeping the current £20,000 cap for stocks and shares ISAs.
The Government hopes that would encourage those with more money to save to put it into the most productive investments, stimulating the economy.
Stock markets in the UK and elsewhere have tumbled since Donald Trump announced he was imposing tariffs on nearly all the US’s trading partners.
Academic Stephen Barber told The i Paper: “To reform the cash ISA right now is highly questionable given the implication that otherwise risk-averse savers should be investing in a stock market set into freefall by the same Trump kamikaze economic policies that have wrecked the Chancellor’s careful budgeting.”
