Uncertainty for savers as Rachel Reeves eyes ISA changes

The Herald Scotland

2 days ago

Recent months have seen intense debate about potential ISA reforms, particularly following Reeves' Spring Statement in March, where she expressed a desire 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'.
The prospect of slashing the cash ISA allowance from £20,000 to as low as £4,000 has sparked alarm, with fears it could penalise cautious savers. On 20 May, the Chancellor confirmed to the BBC that the overall £20,000 ISA allowance would remain intact. Yet, her silence on the specific cash ISA limit within the overall allowance has kept speculation alive, with a potential cut remaining on the table as part of a broader review expected to be launched in July's Mansion House speech.
The rationale behind potential reforms is partly rooted in a desire to channel more capital into UK markets. Reeves has been vocal about revitalising the London Stock Exchange, noting that 'hundreds of billions of pounds in cash ISAs' are not being invested productively.
This echoes the recent Mansion House Accord, an agreement with the UK's largest workplace pension scheme providers to allocate at least 5% of their default funds to UK private market assets by 2030, which could be followed by further measures aimed at supporting UK public markets too. By potentially nudging cash savers towards stocks and shares ISAs, the government may also hope to address the UK stock market's challenges, including a decline in initial public offerings (IPOs), companies relocating listings overseas where they can command higher valuations and private equity buyouts, factors which have led to a 20% decline in the number of UK listed companies over the last five years.
One proposed reform, floated by investment bank Peel Hunt, involves simplifying the ISA system by merging cash and stocks and shares ISAs into a single product and abolishing lifetime ISAs and innovative finance ISAs. Peel Hunt argues that with ISA tax reliefs costing the Treasury an estimated £9.4 billion annually, redirecting these incentives towards UK-focused investments could deliver better value for taxpayers. While such a move would align with Reeves' growth agenda, it would severely limit investor flexibility.
From a public policy perspective and for the brokers and fund managers who make a living off the UK markets, the case for refocusing ISAs on UK assets may seem compelling. The UK stock market has struggled as pension funds have dramatically reduced their UK equity holdings since the late 1990s, and retail investors have increasingly favoured US equities.
However, from the perspective of ISA investors, such restrictions would be a step backward to the old days of personal equity plans, which had such limitations on overseas investments before they were replaced by ISAs. Limiting stocks and shares ISAs to UK assets – or requiring a minimum level of UK exposure - would reduce the scope for diversification, a cornerstone of sensible investing. Historically, overseas markets —notably US equities — have often outperformed UK equities over long periods. Forcing investors to prioritise UK stocks could undermine the very returns Reeves seeks to enhance.
A potential beneficiary of a UK-focused ISA regime could be the investment trust sector, which has faced headwinds recently with trusts trading at wide discounts, limited new share issuance and the arrival of activists on the scene. UK-listed investment trusts that invest globally, many of which are managed in Edinburgh, might attract fresh demand if investors are required to allocate a portion of their ISA to UK-listed assets. Such trusts could offer a workaround, allowing exposure to international markets while supporting the UK financial services sector, a significant tax revenue generator and employer in both London and Edinburgh.
An alternative to mandating UK investment in ISAs could be through incentives or the removal of impediments, such as scrapping stamp duty on UK share purchases within ISAs, which undermines the 'tax-free' promise and is a disadvantage over buying US shares where no such transaction tax exists. An even bolder idea would be a modest income tax credit or top-up 'bonus' for stocks and shares ISA subscriptions, subject to a minimum holding period to prevent short-term trading. This could incentivise equity investment while preserving saver choice.
As we await the launch of the consultation and its outcome, likely to be detailed in the Autumn Budget, savers and investors would be wise to make use of the current allowances while they can, especially given the high tax burden. The £20,000 ISA allowance is safe for now, but changes to cash ISAs or restrictions on stocks and shares ISAs could reshape how we save and invest in the future. The Chancellor's desire to boost UK investment is laudable, but it must not come at the expense of savers' flexibility or financial security.
Jason Hollands is a managing director at wealth management firm Evelyn Partners which has offices in Glasgow, Edinburgh, and Aberdeen