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Reeves’s final act as Chancellor is a blundering betrayal of Britain’s savers
A thicket of new Isa rules and a blunt tax charge will deter millions from investing
Before the election, Labour spoke persuasively about simplifying the savings landscape and encouraging more people to invest in productive UK assets. It was one of the more compelling ideas in its programme and a commitment that those of us who have spent decades helping people save and invest could wholeheartedly support.
Rachel Reeves’s long-trailed Isa overhaul has now landed. Unfortunately, it achieves almost exactly the opposite.
Rather than simplifying the landscape, it introduces fresh complexity. Rather than encouraging investment, it risks making cash relatively more attractive. The Government has pressed ahead regardless, despite retail investment platforms warning publicly and privately that this is the wrong answer to the wrong question.
So, what exactly is changing and why? We have known for a long while that the cash Isa allowance will be cut from £20,000 to £12,000 for under-65s from April 2027. The Treasury hopes a slice of that displaced £8,000 will find its way in to long-term investments, including UK-listed companies.
If the aim is to help people move sensibly from cash to investing, the obvious reform was to bring cash Isas and stocks and shares Isas together in a single, simple product: an approach I have championed for the best part of a decade and one backed by behavioural evidence.
A combined cash and investment Isa would move us away from the “turn left for cash, turn right for investing” mentality we see today, which inevitably leads most to opt for cash and then stick with it.Instead, the Chancellor has chosen to reinforce the very barrier she should be dismantling.
Having abandoned the sensible policy of simplification, perhaps we should not have been surprised that the Government reached for a thicket of rules designed to stop people dodging the cut.
Transfers from stocks and shares Isas to cash Isas will be banned from April 2027. That is unwelcome, but it is an inevitable consequence of the Government’s own design flaw: without such a ban, anyone could simply subscribe £20,000 into a stocks and shares Isa each year and then move the money into cash.
The proposed 22pc charge on interest paid on cash held in a stocks and shares Isa is different. It is not inevitable. It is not necessary.
It risks muddying the fundamental tax-free promise that has underpinned Isas for a generation. A similar policy outcome could have been achieved by preventing firms from marketing stocks and shares Isas as cash vehicles, or by allowing cash to be held tax-free where it is clearly being used for investment purposes.
Instead, the Treasury has reached for a blunt instrument that fails to recognise the ordinary role cash plays in investing, from paying platform fees and providing a safe harbour in volatile markets to managing liquidity as people approach retirement or other financial goals.
Then there are the new rules for cash-like investments, principally money market funds. Anyone found to be holding 100pc of their portfolio in these assets will be treated as ineligible for Isa status, with firms expected to support investors either to sell and reinvest within the Isa wrapper, or remove the holding altogether.
This has the feel of policy designed in a vacuum. It is complexity for complexity’s sake, not reform built around the needs of retail investors.
Amazingly, it could have been worse. Plans to apply the interest charge and cash-like investment rules only to under-65s were dropped at the last minute, sparing the industry and customers from an even more baffling age-based regime.
But that late retreat does not alter the central problem: taken together, these reforms will make life more complicated for ordinary investors and are every bit as likely to deter engagement as encourage it.
Fortunately, policies are not set in stone. I am encouraged greatly by reports suggesting Andy Burnham will appoint respected economists such as Jim O’Neill and Andy Haldane to his team at No 10. It suggests an administration that is willing to listen to and challenge ideas, rather than blindly defending them.
In search of some logic, I dug out the Office for Budget Responsibility’s estimate of the tax raised by these measures. On its best guess – and behavioural responses here are highly uncertain – the total amounts to around £70m over five years. That is a rounding error in public finances, yet apparently sufficient to justify rewriting the rulebook for millions of savers and every investment platform in Britain.
This was never really about raising money. It is intended to deliver a manifesto commitment. Savers get less clarity, providers inherit more administration, and the UK gets no credible route to a stronger investing culture. The irony is that it risks doing precisely the opposite.
[Source: Daily Telegraph]
