RACHEL RICKARD STRAUS: I fear Labour is set to slap tough new rules on where you invest your Isa

Daily Mail​

2 days ago

It is all but certain that Chancellor Rachel Reeves will slash the amount that we can put in cash Isas.
She has repeatedly refused to deny that she will – and industry sources suggest the most likely limit will be £4,000 of our total £20,000 tax-free allowance – the rest to be used only for investing.
But details hiding in official savings figures that have until now been overlooked make me fear that far more Isa restrictions are on the cards. Here's why.
Reeves has stated two motivations for meddling with Isas. The first is helping people to get a better return on their savings. Her theory is that if she restricts the amount we can save tax-free in cash we will invest instead (whether this strategy will work is debatable: it is more likely that we will just divert our cash into ordinary savings accounts).
The second motivation is the one underlying all of Reeves's decisions: to help drive economic growth. This ambition will not be fulfilled simply by restricting cash Isa limits. Even if it leads to a wave of cash flooding into financial markets, only a small pool of it will go into UK companies.
New investors are likely to put money into popular stocks – such as Nvidia, Meta and Apple – rather than favouring the UK.
The UK makes up only 4 per cent of the global stock market, so an investor opting for a well-diversified portfolio would be unlikely to put much into this country.
That's why, if Reeves wants to achieve her aims, she will have to force us to invest in assets that would boost UK growth.
She may insist that a portion of stocks and shares Isas must be directed at UK companies. She made a similar demand of pension funds last week – and sources tell me this is being discussed for Isas as well.
It wouldn't be the first time such an idea was mooted – the previous government considered something similar when it tried to launch a British Isa that savers could use to invest in UK companies.
The next clue that Reeves will force – or incentivise – savers to invest part of their Isa allowance in the UK is in the Premium Bond figures.
Premium Bonds hold so much of our cash that if encouraging us to invest more was her sole priority, she'd be slashing the amount we can put in them too.
From a saver's point of view, Premium Bonds offer an even poorer return than cash Isas. At least in an Isa you earn interest. With Premium Bonds you're simply holding out for a prize.
There are millions more holders of Premium Bonds than cash Isas – around 24 million versus just 14 million – and we hold a stonking £127.7 billion of cash in them.
As many as 1.2 million savers hold the maximum permitted amount of £50,000 in Premium Bonds. No doubt plenty of that cash could be earning a better return if invested instead.
If her priority was to get better returns for savers, she would slash that maximum. But, of course, she won't.
Not just because it would be unpopular – that has not stopped her in the past. But because, unlike cash Isas, money saved in Premium Bonds does help drive economic growth.
Premium Bonds are one of the products sold by NS&I to bring in billions for the Government for it to spend. It is a form of government borrowing – but one that doesn't appear on the books like other types of debt.
Her willingness to overlook poor returns for savers in Premium Bonds shows where her priorities lie: economic growth first, savers' wealth second.
The third clue lies in the official Isa figures from HMRC.
They reveal that restricting the amount we can save in cash to encourage us to invest more will not work.
Until 2015, Isa allowances were restricted just as Reeves is currently planning. You could only put a proportion of your Isa allowance in cash – the rest had to go in stocks and shares.
If Reeves is right that savers need to have their cash Isa allowance curbed to get them to invest, you would expect that savers might have flocked to cash as soon as the rules were abolished in 2015. But they did not. In fact, when they were permitted to save as much of their allowance in cash as they liked, they chose to invest more.
Before 2015, for every £10 going into a cash Isa, £4.10 went into a stocks and shares Isa. After 2015, for every £10 going into cash, £5.90 went into stocks and shares, analysis by investment platform XTB shows.
The proportion going into stocks and shares has ballooned – we hold £431 billion in stocks and shares Isas, compared with £294 billion in cash Isas.
So the Chancellor can't use the excuse that she needs to restrict cash Isas to get savers to buy more stocks and shares – they are already investing more. But that won't matter to her.
The real motivation is to drive growth – and in this plan cash savers are merely a pawn.
So what comes next? I fear the freedom to save and invest within our Isa however we choose is about to be clobbered on all fronts.
Savers need to prepare for a regression back to 1999, before the Isa was even launched.
Back then, savers were reliant on Personal Equity Plans. These were the predecessor of the Isa and offered tax-free investing but required you to put a proportion of your allowance into UK companies.
That is where we're heading – back where we started, with our freedoms restricted, as if nothing had been learned.