Our savings are lazy – the budget must take advantage of it

Rachel Reeves should cut ISA cash limits and shift savings into UK equities, says Steven Fine

The old adage in finance is “money never sleeps”: yet many of us are lazy. The UK currently has almost a trillion pounds of ISA savings, but too little of it is being utilized for our economy. What started as a policy to help connect many people’s savings with British companies a quarter of a century ago has now lost its way. This needs to change in the next Budget.

Cast your mind back to 1999 if you can. When Gordon Brown introduced ISAs, his aim was simple: open up investment more broadly, channeling household savings into shares, bonds and funds that would boost growth, employment and productivity. Savers can put the entire initial allowance of £7,000 in stocks and shares if they wish, compared with just £3,000 in cash. But currently, with a cash limit of £20,000, cash ISAs hold around £440 billion. Last year, adults put £103 billion into ISAs: £70 billion in cash, £31 billion in equities. Of the 15 million adult ISA accounts, only 4 million choose equities. As a country, we provide more than £9 billion of tax relief a year, but the vast majority of that tax relief favors idle cash over investment.

Last year, adults put £103 billion into ISAs: £70 billion in cash, £31 billion in equities

So it’s time to bring ISA back to its original purpose and in line with its original vision. Cutting the ISA cash limit to £10,000 makes sense when two-thirds of savers never reach the limit, and half of the amount invested in stocks and shares should go to UK-listed companies. This is not unprecedented or protectionist: it reflects the old Personal Equity Plans of the Nigel Lawson government in the 1980s, which required 75 per cent domestic investment. This will help revive demand for UK shares and rebuild confidence in public markets.

None of this should deter investors from transacting in foreign markets: don’t give them tax breaks for doing so. The way we currently divert funds from the UK creates a cost of capital for our company and impacts valuation. This is one of the reasons why we see so many issuers moving elsewhere. Directing domestic savings into UK equities would help redress the imbalance and encourage companies to invest in innovation, people and productivity. This would also help address chronic underinvestment in domestic shares by UK funds compared to other countries. Cash-cut ISAs are tax efficient, but what’s the point if the benefits increasingly favor overseas-registered companies?

Fairness

It makes sense that government-backed tax breaks are focused on growing the domestic economy. Every pound should fund innovation, jobs and competition in the UK. We live in a highly competitive world, which begs the question: why are our pension funds playing games with global altruists, and supporting companies elsewhere? Tesco employees paying into their pension funds saw a 70 per cent portion of their equity directed to the US market, where one of the biggest stocks on the S&P is Walmart. The same goes for the Rolls-Royce employee pension fund that supports GE, or the Glaxo employee nest egg that goes to Pfizer.

Opponents argue that cutting ISA cash limits would impact mortgage lending. That argument is also implausible. For example, if you go back to 2017-18, when the cash limit increased to the current £20,000, mortgage lending did not change. Mortgage demand is driven by interest rates, housing affordability and buyer confidence, not the exact size of the ISA cash limit. However, any shortfall in ISA savings will likely be offset by savings flowing into alternative accounts. Keeping cash ISA limits too high would benefit society’s development interests, not the wider economy.

Reforming the ISA is not nostalgia or protectionism. It’s time we did something about this when UK companies employ millions of people, pay billions of dollars in tax and support regional prosperity. Every pound flowing to UK companies through ISAs will support such worthy causes.

Steven Fine is CEO of investment bank Peel Hunt