The Chancellor has confirmed she has abandoned plans to reduce the £20,000 tax-free saving limit on Isas amid growing bank backlash.
The announcement is a major U-turn for Rachel Reeves, who had long hinted she was considering lowering the limit to £4,000 to encourage more people to invest in the stock market.
However, she told the BBC on Monday that she was heeding mounting pressure from the City and dropping the proposal.
“I’m not going to reduce the limit of what people can put into an Isa, but I do want people to get better returns on their savings, whether that’s in a pension or in their day-to-day savings,” she said.
“And at the moment, a lot of money is put into cash or bonds when it could be invested in equities, in stock markets, and earn a better return for people.
“But I absolutely want to preserve that £20,000 tax-free investment that people can make every year.”
Last month, the government confirmed it was looking at reform options for Isas, which would be the biggest overhaul to the savings system since its creation in 1999.
However, concerns have increasingly been raised by City figures that the reforms will not have the desired effect.
Emma Reynolds, the City minister, reportedly met with senior executives from NatWest, Lloyds, HSBC, Barclays, Nationwide and TSB last week, where the issue was raised.
square ISAS Five things to know about Reeves's cash ISA reform in five minutes
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Banking lobby group UK Finance, which reportedly hosted the meeting, has since cautioned against any changes “to avoid restricting consumers’ options”.
Following that meeting, Stuart Haire, the chief executive of the Skipton Building Society, told The Telegraph: “We agree with the Government that people in the UK should increase, if they have the wherewithal and the risk appetite, the amount of money they have got in equities.”
“However, changing the cash Isa limit will not do that, so therefore it’s the wrong tool to achieve the policy outcome.”
Around 18 million people hold cash Isas, which allow households to save without paying income tax on interest.
Hinting at the initial plans for the reforms in February, Reeves explained that she wanted to create “a culture… of retail investing” to achieve “better returns” for UK savers.
Reeves’s deputy Reynolds had also called for the UK to adopt an investment culture “that realises cash is not a good investment”.
She told a committee meeting in the House of Lords earlier this year: “Why have we got hundreds of billions of pounds in cash Isas? We have failed to drive an investment culture.”
Soon after, the Treasury announced that a comprehensive overhaul of Isas would be “under review” in advance of the Autumn Budget later this year.
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