Perhaps Now Is a Good Time to Re-think The ISA Structure

Chancellor Rachel Reeves has addressed the rumours that a reform of the popular cash Individual Savings Account (ISA) scheme is set to take place, and many campaigners are fighting back. It is thought that the Government may introduce a drastic cut in the annual tax-free savings allowance, taking it from £20,000 to just £4,000.

Many cash ISA savers are reportedly alarmed at the prospect of being pushed toward riskier investments, such as stocks and shares ISAs, if these changes take effect. Many organisations have voiced their concerns, including the Building Societies Association, which has released research showing that 73% of UK adults with cash ISAs are against the Government’s rumoured plans due to concerns that their savings will be under threat. Given that 1 in 10 adults (40% of the population) hold cash ISAs, this is a significant percentage of dissatisfied savers. 

Others see the move in a more positive way – pushing savers toward riskier stock market investments where potential returns are higher, rather than the more secure, guaranteed returns of a traditional savings account.  

It is common knowledge that over the longer term, stock market investments have significantly outperformed cash savings. While it’s true that cash ISAs are perfect for emergency savings, on the other hand if you’re saving for a house deposit, home improvements, or even retirement, then a stocks and shares ISA is likely the more effective route. 

It’s clear many people are making a conscious decision to save in cash rather than stocks and shares, but it raises an important question. If there was a hybrid model, along with improved education and perhaps a softer introduction (making it optional to start), could some of these fears and anxieties be addressed? 

Cash ISAs were introduced in 1999 and currently are used by more than 18 million savers. Data from the Bank of England showed 2024 was a record year for the cash ISA market, with savers depositing almost £49.8 billion – up from the previous record of £47.1 billion in 2023. 

UK savers are very familiar with the concept, and the ISA name is widely recognised. Today, cash ISA forms a key part of many people’s financial plans, held with banks and building societies, and other providers using the deposits to fund loans to households and businesses. 

Reducing tax breaks on cash ISAs won’t in itself suddenly mean savers start investing in stocks and shares ISAs, it will simply punish savers, particularly the older generation, who rely on cash ISAs to manage their finances.  

HMRC data shows that people over the age of 65 are among the biggest users of cash ISAs, and this cohort arguably have very different needs and uses of cash ISAs: 

• They have different financial needs 

• They focus on the shorter-term savings window 

• Cash ISAs give them easy access 

• Many use them to top up pension income  

It is commonly advised that anyone considering investing needs to have at least three to six months’ worth of expenses saved in an accessible account first. Cash ISAs are a great way to build that emergency fund, especially for those starting with limited amounts.  

So, what if a hybrid option was introduced, along with focused, easy to understand educational material? 

The Hybrid ISA 

Consisting of two pots with an overall maximum contribution limit, the hypothetical hybrid ISA would allow savers to contribute to an initial cash pot with a target amount of their choosing. Once reached, this could be transferred over to the second pot, where it would become a stocks and shares investment and earn interest.  

The hybrid ISA would provide a solution for every demographic and would offer the saver flexibility as their needs change over time. Flexibility is needed to ensure the products offered are relevant throughout the policyholder’s life, and crucially to ensure that the requirements of Consumer Duty are fulfilled. Retirees can continue to supplement their income from their cash ISA to avoid volatility, and crucially, this approach would support a savings culture in the UK that savers of all demographics and risk profiles can benefit from. 

In conclusion, listening to consumers’ needs is essential, especially given the dynamic nature of those needs throughout the consumers’ lifetime. ISAs, whether they are cash or stocks and shares, are taken out based on consumers’ current needs and behaviors, however we know that both of these change over time. 

The hybrid approach allows for these changing needs, delivering flexibility to consumers rather than ostracising them by limiting flexibility with limits on cash ISA investments.  

And let’s not forget, Consumer Duty means consumers should get:  

• The support they need, when they need it  

• Communications they understand  

• Products and services that meet their needs and offer fair value