Rachel Reeves shouldn't lower her cash ISA limit to £4,000

Jessica Sheldon says that a £4,000 cap on the amount that can be placed in a cash ISA is an unwarranted assault on savers and shouldn't be the top priority

Saving money has become more challenging due to rising living expenses that have reduced disposable income and frozen income tax bands, which essentially result in a tax increase. Even when we have the financial means to save for the future, savers run the risk of paying taxes on the interest due to higher interest rates and frozen tax breaks.

For this exact reason, cash ISAs have grown much more appealing in recent years. According to consulting firm CACI, between January and October 2024, adult cash ISA balances rose by 38.5 billion, while adult non-ISA account balances increased by 9.5 billion.

The annual ISA allowance has allowed savers to put money aside for immediate objectives without fear of interest taxes.

They are a particularly significant product at the moment, enabling British citizens to save up to £20,000 annually from the tax collector. Ten times as much as the 1 point 4 billion raised in the 2021/22 tax year, 10 point 4 billion is anticipated to be generated from savings interest in the 2024 - 2025 tax year, according to HMRC data.

However, Rachel Reeves is allegedly being pressured to set an annual cap of 4,000 on deposits into cash ISAs, which could put them in jeopardy. The idea is that this would encourage investment in UK stocks instead.

British citizens could only contribute a fifth of their current amount to these tax-free savings accounts if a 4,000 cap were added specifically for cash ISAs.

This would be a very bad move, in my opinion. For savers, who ought to have the freedom to decide whether or not to invest instead of save, it could be a huge hassle.

It is not a good idea to force people into stock and share ISAs.

Like many others, I was taught at a very young age the value of putting money aside for the future and working hard. I still recall how happy I was when I was able to purchase a Sylvanian Families set that I had long admired after carefully saving up my pocket money every week, 50p at a time.

Now that I'm an adult, I've been putting money each month from my paycheck into a high-yield savings account progressively. I've learned to invest and save instead of splurge, and I'm thankful for that. I was not compelled to adhere to these values by anyone. Instead, I received coaching and encouragement, and I decided to pursue it as a career.

Establishing a specific cash ISA deposit cap in order to coerce people into investing in stocks and shares is the wrong mindset.

It shouldn't be necessary for us to spend our savings. Once we have paid taxes and national insurance, we should be able to choose how we want to spend and manage our hard-earned money. We are old enough to generate our own income, so the government has no right to dictate how we do it.

Enhancing financial education would be a far more effective way to encourage people to invest than eliminating the ability to use the entire tax-free allowance in cash ISAs. More attention should be paid to outlining the available options. A good place to start is by weighing the benefits and drawbacks of cash versus stocks and share ISAs.

Knowing how inflation can reduce savings is more likely to encourage people to examine their financial situation. For instance, if someone put £10,000 into a cash ISA in December 2012, they would now have £11,955. This only comes to 7,918 when adjusted for inflation, according to Quilters' calculations. Educating the public about this would be more successful than a politician imposing an arbitrary cap on cash ISAs.

An ISA cap of £4,000 in cash could harm the real estate market.

Many people are working very hard to climb the property ladder, so setting a 4,000 cash ISA limit would be a bad idea.

I can attest to this. I have spent years trying to climb the real estate ladder. Saving money in top tax-free savings accounts and a lifetime ISA seemed like a better option than investing because I had hoped to be able to purchase within five years.

Enforcing a 4,000 cap at a time when cash ISAs are so alluring would only serve to complicate matters for potential first-time buyers, who already find it difficult to raise the required mortgage deposit due to rising housing and living expenses.

However, the dangers are not limited to first-time purchasers who are frantically attempting to accumulate a mortgage deposit. It might also lead to confusion when applying for a mortgage.

The Building Societies Association's CEO, Robin Fieth, has cautioned that cash ISAs are a significant source of funding for banks, building societies, credit unions, and other providers that use the deposits to finance loans to individuals and companies.

He warned in a letter to Reeves that significant changes to cash ISAs would affect the availability and cost of these loans.

While cash ISAs "play an integral role in the UK savings market and have done for many decades," Fieth noted that they also assist customers in reaching their savings objectives. "They are an example of a successful policy that we should aim to expand upon, not to curtail," he continued.

An additional ISA limit could be perplexing.

According to recent HMRC data, 18 million people have cash ISAs, but 21.1 million are anticipated to pay taxes on their savings this fiscal year. In September 2024, AJ Bell's Freedom of Information request revealed that this is an increase from about 650,000 three years prior.

The last thing savers need is a new limit, since so many people will be forced to pay taxes on their savings interest.

In April 2024, ISA regulations were made a little more straightforward. The new regulations permitted you to open multiple ISAs of the same type within a single tax year. Before, you were only allowed to open one cash ISA annually.

However, there are still a lot of unclear ISAs.

The annual ISA allowance, for example, already has a set limit. If you don't go over the total 20,000 cap, you can contribute up to 4,000 per tax year to a Lifetime ISA. Investors can receive a 25 percent government bonus on their LISA contributions, up to £1,000 annually.

There are severe regulations regarding withdrawals; if you make an "unauthorized withdrawal," you will be charged 25% of the entire amount in your pot. If you invest 800 and receive 200 from the 25 percent government bonus, you will have 1,000 in a Lifetime ISA. You would only have 750 if you took out the entire pot, though, as you would be charged 25%.

This indicates that investing in a Lifetime ISA is a significant commitment. First-time buyers in 62 UK areas may find it more difficult to meet the "authorised withdrawal" requirements as home prices rise, potentially disqualifying them from using Lifetime ISAs to make purchases. Therefore, rather than reducing the amount that individuals can deposit into cash ISAs, would Reeves be better off concentrating on making this product better?

I believe that instead of making needless changes to cash ISAs, Reeves should make them easier to use and comprehend and consider ways to encourage investing in Britain rather than taking away options.