Rachel Reeves should abolish the cash ISA to reverse the “alarming decline” of UK investments, a new report has revealed.
Trading provider IG says the UK has long prioritised a savings-first mindset, but at the same time, discourages ordinary people from investing in the stock markets.
Their analysis shows that cash savers have seen around just one seventh of the real returns – after accounting for inflation – of UK investors since cash ISAs were first established by the Government in 1999.
Despite this, cash ISA subscriptions are rising while stocks and shares ISAs are falling.
The campaign comes at a critical moment for UK equity markets, the report said, with high-profile companies increasingly choosing overseas listings for better returns.
IG is proposing a four-point policy framework to help “resuscitate” the UK stock market while also benefitting the public by getting more people investing.
This includes redirecting ending cash ISA openings and bringing the cash allowance to zero from April. It also wants to see stamp duty on shares, which is applied at 0.5 per cent of the total value of the share, removed.
Michael Healy, UK managing director at IG, said we’re watching a “crisis unfold” and we need “bold action”.
He said: “Our stock market – once the envy of the world – is in a downward spiral. At the same time, the UK is stuck in a damaging savings-first mindset, with far too few people investing to build wealth for the long term.
“We’re calling on the Government to deliver the urgent policy changes our stock market needs. For too long, policymakers have been paralysed by the desire to keep everyone happy. But the time for working groups is over – this is about getting more Brits investing, while saving a strategic national asset before it’s too late.”
It comes after months of speculation that the Chancellor could scrap cash ISAs or reduce their £20,000 allowance in a bid to get more UK investors in stocks and shares ISAs.
Following the speculation, the Treasury confirmed in the spring statement earlier this year that the Government was launching a review of the ISA and the cash ISA market.
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However, pensions minister Torsten Bell confirmed in May that the Government will be continuing the cash ISA.
Several experts told The i Paper that whilst the industry needs reform, abolishing the cash ISA is not the right approach.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said the cash ISA is a “vital tool” to enable people to create a robust emergency savings net without having to worry about tax.
Speaking to The i Paper, Ms Coles said: “Everyone should hold some cash, but not too much, and getting the balance right is always tricky.
“However, reducing the tax incentives for the cash ISA isn’t the answer, and could expose diligent savers to tax.”
Ms Coles, however, agrees that a cut to stamp duty on share dealing would be a big nudge of encouragement, adding it is “unreasonable” that investors buying UK shares have to pay stamp duty when most overseas share trades are tax-free.
Rather than scrapping the cash ISA altogether, Rachael Griffin, tax and financial planning expert at Quilter, said: “A unified ‘One ISA’ framework could simplify the system, combining cash and investment elements to meet a range of saver preferences and risk profiles.
“Similarly, targeted Government bonuses on investments could nudge behaviour more constructively than removing choice.”
Tom Selby, director of public policy at AJ Bell, added: “Any restriction on holding cash in ISAs would be deeply unpopular and likely largely ineffective.
“In practical terms it would also add huge complexity. Rules would be required to police the system, likely involving a ban on cash to stocks and shares ISAs transfers to prevent backdoor access to a higher allowance before moving the money to cash.”
On stamp duty, he said: “Stamp duty on UK shares is ripe for review, although the multi-billion cost of scrapping the tax altogether may be offputting for the Treasury.
“However, removing stamp duty for UK shares bought through ISAs would cost around £100m a year – a very low figure in Government spending terms.
“This package of reforms – simplification, targeted support and scrapping stamp duty on UK shares bought in ISAs – would represent a sensible, low-cost route to delivering the retail investing revolution the Chancellor is aiming to achieve in the UK.”
The Treasury has been contacted for comment.
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