The rumour mill is hotting up ahead of the Autumn Budget with a lot of concern around what could happen with pensions, especially around tax free cash.
But there are also reports that Chancellor Rachel Reeves is preparing to resurrect plans to cap cash Isa contributions at £10,000 – half the current £20,000 annual Individual Savings Accounts (Isa) allowance. Reeves’ ambition is clear: get Britain investing again, channel billions into UK equities, and build what her City minister, Lucy Rigby, recently referred to as a “shareholding democracy”.
The Chancellor is determined to shake up Britain’s savings culture and breathe life back into our equity markets. She’s had great success with pensions and private markets, but can she go one step further with Isas and transform a nation of cash savers into confident investors?
The Chancellor is right to question the status quo but we need to be digging deeper into what’s really holding people back from investing. Naturally, there are opponents to any cash Isa tax changes, but some are already quietly proving that you don’t need big alterations to get people investing.
The success of auto-enrolment has got millions of people saving and investing into a pension and now the challenge is getting them more engaged and paying in more. A big part of the answer for pensions is the same for Isas – we need to make things easier, simpler and digital.
Cash vs investing
Undoubtedly, cash Isas are the most popular savings product among Brits, with an estimated £360bn locked away, according to data from HMRC. So it only seems fair to question whether savers are thinking enough about long-term goals when it comes to their Isas, and the negative impacts of holding only cash versus the potential upside of investing.
As a pensions industry we know all about the importance of long-term investing. Plus, when you consider that inflation is currently running at about 3.8 per cent, that means that people saving into many cash products could be in for a real-terms loss.
Combine that with the fact that equity markets have historically delivered significant returns above inflation, and the case for investing becomes a lot clearer.
The real barriers facing savers
Of course, the argument here is more than just about pitting cash against investing. We need to address the more fundamental issues facing people’s approach to, and understanding of, long-term saving.
I don’t believe that the issue is only one of ignorance or apathy. Far from it. People are no doubt aware of the potential of investing, increasingly so now millions more people are auto-enrolled. But there’s a behavioural mindset that’s easy to recognise, and it’s that people know where they stand with cash – there’s a relative security and stability that’s hard to pass up.
The main barriers we need to address, then, are about confidence and accessibility. When investing often feels like entering a foreign country where you don’t speak the language, is it any wonder people want to stick with what they know with their Isas? The industry talks to people about ‘asset allocation’, ‘risk-adjusted returns’, and ‘portfolio diversification’ – when all people want is to be spoken to in clear-cut terms.
We need to answer key questions: “Is investing suitable for my situation?” “How much growth can I expect to see?” “What happens if I need access to my money?”
Let’s focus on offering clarity. We need to be thinking about how we present investment options, how we explain risk and return, and how we support people through their investment journey.
Most importantly, we need to show people that investing doesn’t have to be an all-or-nothing decision – they can start small, choose simple diversified funds, and adjust as their confidence grows. Just like in their pension. Crucially, they can hold both cash and investments in the same Isa too.
Simplicity and ease of use are also a big factor. As well as jargon-free language, we need straightforward digital-first processes – opening an account in minutes in a phone app, switching between cash and investments with a few taps, consolidating old Isas without a single form to print.
Strip away complexity
Strip away the complexity, simplify the language, and focus on customer experience. And then all of those behavioural barriers begin to fade away.
We offer an Isa alongside our workplace pension and nearly 90 per cent of our Isa customer holdings are in investments rather than cash.
So maybe the key to getting the country investing in Isas isn’t about changing tax limits, maybe it’s the opposite idea: keep it simple. Whether it’s a pension or an Isa, it’s about putting money to work and engaging people in the right way, talking to them without jargon and on their terms.
I agree that the Chancellor needs to challenge the status quo on Isas. But let’s ensure any reforms focus on breaking down barriers to investment, and thinking about peoples’ savings holistically, not simply building new walls around cash.
The goal should be confident investors, not reluctant ones. If we want to build a “shareholding democracy”, we need people who understand and believe in investing, not those who’ve simply run out of alternatives.
Steve Watson is director of policy & research at NatWest Cushon