The solution to Britain's savings crisis is staring Rachel Reeves in the face

Telegraph

17-05-2025

Speculation about reforming Isas has been running wild in 2025, with the rumour mill largely focused on the future of cash Isas. As things stand, Britons can pay up to £20,000 each tax year into their Isas, a level some have argued should be lowered for cash Isas in the hope of nudging more people to invest for the long-term.
For its part, the Government has said it wants 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'.
These aims are laudable, and the potential prize here is significant. AJ Bell's analysis of HM Revenue and Customs (HMRC) figures suggests around £100bn is held by people with £20,000 or more in cash Isas who have not invested a penny in stocks and shares Isas.
Although some will have sensible reasons for only saving in cash, such as those in retirement holding unspent cash withdrawn from their pension plan, many others will have a longer-term time horizon and will be missing out on greater long-term returns from investing.
Slashing cash Isa allowances might seem an intuitive policy response, but our research suggests this would be both ineffective and unpopular.
Just one in five cash Isa holders say they would migrate to investing in the UK stock market if the cash Isa allowance was reduced or abolished, with the majority (51pc) saying they would simply stick the money in a taxable savings account, and a further 24pc indicating they would opt for NS&I products.
This illustrates the savings challenge we have on our hands – as a nation, we are overly focused on cash savings. But catalysing a change in behaviour won't be achieved using a stick to beat cash savers.
Cutting the cash Isa allowance would also be politically unpopular. Just 3pc of cash Isa savers agreed the £20,000 allowance should be reduced, an important figure for a government languishing in the opinion polls.
Luckily for the Chancellor, there is a straightforward route to improving Isas that would support people switching from cash to long-term investing. We believe simplifying Isas would help remove the barriers between saving and investing at zero cost to the Exchequer and with no need to pursue the unpopular move of slashing the cash Isa allowance.
Currently, the Isa system labels people as either cash-only savers or investors, with a distinct product for each group. Essentially, when you choose your Isa, you either turn left for cash or right for investing.
This structure implies that people are either risk takers or they are not, and HMRC's figures suggest people tend to take an either-or decision, with only a small number of people holding both a cash and stocks and shares Isa.
But any financial adviser will tell you this misunderstands the needs of the vast majority of people. Most people should hold some money in cash for emergencies or short-term needs, but they will also want some of their funds working harder over the long-term.
Having separate products for cash and investing requires multiple products to be held, or product switching to be undertaken. Friction between the two could easily be removed by merging cash Isas and stocks and shares Isas to create a single Isa product, making it easier to transition between cash and long-term investing.
It would also simplify the upfront choice new investors are required to make. Rather than choosing a cash Isa or a stocks and shares Isa, they simply opt for an Isa.
Under the current system, which appears to many as a binary choice, millions simply choose the path of least resistance and save in cash alone, often never even exploring the investment route at all.
Isa simplification of this kind could form a powerful double act with 'targeted support' reforms currently on the table. In simple terms, targeted support should allow investment providers to offer more help to consumers, which is specific to people like them but without going so far as to provide the kind of advice provided by a professional financial planner.
While still a work in progress, those reforms could make investing easier for many people.
A simpler Isa system combined with more help for consumers could provide the foundation for the retail investing revolution Rachel Reeves hopes to see.
The big win here for the UK as a whole is that is that DIY investors are big supporters of domestic companies (and they also buy the most abundant of assets, UK government debt).
Rules to require a certain amount of the assets in stocks and share Isas to be held in UK companies have again been rumoured. But additional quotas and restrictions are not required.
Half of the assets held by AJ Bell customers in their Isas are already invested in UK assets. Over the long-term, a boost to UK capital markets would be a natural by-product of an improved retail investing culture.
We don't need an Isa system to change the behaviour of retail investors in the UK, we just need a system that makes it far easier for people to become retail investors in the first place.