The industry has been lobbying hard for a rethink on Isas and there is no doubt that there is plenty of room for reform. But to reduce the maximum investment from £7,000 to £5,000 at a time when the Government is anxious to encourage savings, makes no sense at all.
In particular, the decision to reduce the limit on cash Isas from £3,000 to £1,000 is totally illogical. The Inland Revenue’s own statistics show that those who take out cash Isas are exactly the market which the Government is trying to motivate to save – individuals on average incomes and below.
These individuals also make up most of the 50 per cent of the workforce who are not members of an occupational pension scheme and therefore are unlikely to have pension savings.
Inland Revenue figures show that 6,387,000 of the 7,168,000 individuals who held a Cash Isa at the end of 2002 (the latest available figures) had incomes of £30,000 a year or less. The figure is undoubtedly higher now.
Far from reducing the maximum investment in cash Isas in April 2006 as proposed, the Government should be considering reform of Isas, doing away with the distinction between cash and equity Isas, and allowing savers to invest the full £7,000 in cash if they so wish.
The recent figures from the Investment Management Association are particularly relevant in this context. They show a net outflow of Isa investment of £23.5m – the first ever recorded net outflow of Isa funds since they were introduced in April 1999 – following what had been the lowest recorded sales of just £25m in August Investors cashing in could be using the funds to repay debt but there is not yet any evidence of this. Much more likely is that they have become disillusioned with the failure of equity markets to perform, and are putting their money on deposit where they can earn a guaranteed 5 per cent gross or more.
The Council of Mortgage Lenders’ figures bear this out. They show a net inflow into cash Isas of £79m in September while net inflows into straight deposit accounts have seen a massive tenfold leap, from £121m in September 2003 to £1,220m in September 2004.
With the likelihood of a sudden revival in the fortunes of UK companies generally acknowledged to be some years away – not least of all because of the huge percentage of corporate profits which will be sunk into the black hole of occupational pension fund deficits – it would make sense to encourage savers to lock this money up in Isas rather than leaving it on easily accessible deposit where it is likely to be frittered away.
The joys of compound interest are not lost on small savers. All the evidence shows that they are prepared to forego the potentially higher rewards that have been seen in equities for the certainty of a guaranteed return on their money and security for their capital.
Indeed, the FSA has endorsed this view and deliberately excluded equ-ity-based products from its “basic advice” regime, on the grounds that cash or near-cash investments are far more suitable for those able to save only small amounts.
Isas, and particularly cash Isas, have provided a valuable incentive to save – and leave those savings untouched because of the loss of the tax breaks – to a wide range of individuals who might otherwise not save at all. Half the population have nothing, or less than £500 tucked away against a rainy day.
There is currently £35bn locked away in equity Isas and another £36bn in their predecessor, Peps. But there is another £87.7bn in Cash Isas. If the Government really wants people to save for retirement, they should think again about reducing the amount that can be invested in Isas and allow 100 per cent to be invested in cash deposits.