The Government could risk derailing its own housing targets if the cash Isa limit is slashed, a building society has warned.
The Financial Times reported that Chancellor Rachel Reeves is looking to use the Budget to revive plans for an overhaul of tax-free Isas as the Government seeks to support an investment culture.
A person close to the process said the Treasury was considering a £10,000 annual cash Isa limit, the Financial Times reported.
It is understood that several potential options are on the table and no decisions have been made.
More than 14 million people in the UK are thought to have over £10,000 saved in cash, and the Government believes some of this could be invested in the stock market to improve people’s financial health.
The cash Isa limit has been the subject of various rumours in recent months, with speculation previously mounting during the summer.
The current annual Isa limit is £20,000, of which all can be put into cash if savers wish.
Investments may sometimes outperform cash savings over the longer term, but the value of investments can go down as well as up.
Charlotte Harrison, chief executive of home financing at Skipton Group said: “Building societies, which fund over a third of all first-time buyer mortgages, rely on retail deposits like cash Isas to fund their lending. If Isa inflows fall, the cost of funding is likely to rise, and that means mortgages could become both more expensive and harder to access.
“That risks derailing the Government’s own target of building 1.5 million homes, a goal that depends on buyers being able to secure affordable mortgage finance.
“At Skipton, we back getting more people to invest, absolutely. But not by penalising savers who want low-risk, flexible options. Cash Isas work. Undermining them doesn’t.
“What’s needed now is a Government-supported, industry-led campaign to boost financial awareness, helping people make confident choices about when to save and when to invest.
“We’ve raised our concerns directly with Ministers and will keep pushing for a balanced approach which protects savers and supports home ownership.”
Jeremy Cox, head of strategy at Coventry Building Society, said: “The simplicity of the Isa is one of its greatest strengths – savers can put in up to £20,000 every year, switch between the stock market or cash, or have a mix of the two.”
He added: “In nudging people toward investing more, the Chancellor needs to be careful she doesn’t throw the baby out with the bathwater and discourage people from building up their cash savings too.
“The Isa remains one of the most popular ways to save or invest and our members keep telling us how unpopular any change to their annual cash allowance would be.”
Brian Byrnes, head of personal finance at Moneybox, said: “Reducing the cash Isa allowance to encourage higher levels of retail investing is a clear case of the right diagnosis but the wrong prescription.
“While we fully support the Government’s ambition to foster a stronger investment culture in the UK, the priority must be to underpin consumer confidence, not to risk undermining it with cuts to cash Isas.”
Denis Cornwall, direct channel manager at Wesleyan, said: “Any steps to encourage a stronger culture of retail investing are welcome if they help improve financial wellbeing.
“For savers, the key will be ensuring investments align with personal goals and tolerance for factors like risk and volatility – especially if they’re thinking about moving from cash Isas to stocks and shares Isas for the first time.”
Tom Selby, director of public policy at AJ Bell, said: “The Chancellor is absolutely right to challenge the status quo on Isas. Any reforms pursued at the Budget should focus on making it as easy as possible for those with excess cash to invest for the long-term.
“The current fragmented market is overly complex and behaviourally illiterate, driving millions of people who could benefit from long-term investing to stick with cash, leaving them vulnerable to the impact of inflation.
“Simplifying Isas by combining the cash and investment versions into a single product is the obvious long-term answer, making the system simpler to navigate and removing barriers between saving and investing.”
Michael Healy, UK managing director at investing and trading platform IG said cash Isas “are completely incompatible with long-term wealth creation”.
He said: “The Chancellor is absolutely right to take aim at this outdated product – and she should go further by abolishing the cash Isa allowance altogether.”
To help encourage the investment culture, the Financial Conduct Authority (FCA) has outlined plans to reduce the “advice gap” with proposals to enable firms to offer a new type of help called “targeted support” and make suggestions to groups of consumers with common characteristics.
A Treasury spokesperson said: “Cash savings are important for people looking to put cash away for a rainy day, and we will protect that.
“But the Chancellor has been clear that she wants to get Britain investing again – so British companies can grow and British savers who choose to can get more in return.”
Andrew Prosser, head of investments at InvestEngine, said: “Younger savers often use cash to build deposits for things like a first home, while older savers use them to manage short-term spending needs.
“Neither group is likely to want exposure to market risk, so reducing the cash limit wouldn’t suddenly push them toward investing their money.
“Instead, many would simply hold the same amount of cash outside the Isa wrapper, meaning more of their interest could be taxed.
“The result could be that UK savers end up worse off, not more invested.
“If the Government genuinely wants to boost investment participation, it should focus on making investing simpler and more accessible, while encouraging better financial education instead of penalising those who prefer to keep their money in cash.”
