What Will Happen to ISAs?

0:00 Rachel Reeves is considering changing ISIS. She's literally said this from the spring statement. The government is looking at options to reforms to individual savings accounts or ISAs. The Treasury has also launched a formal consultation on ISA reform. Anyone consulted you on how you feel about all this? Nope. Didn't think so. Look, I don't normally like to comment on speculation. ISA changes like this have been rumored year after year. Even in the previous Conservative government, they even announced the Briter, didn't they? And that didn't last. nothing ever materialized and speculation is pretty dangerous. It leads to people taking actions that they shouldn't. We should only ever really make investment or financial decisions based on the rules in front of us, I believe. And let's be clear, everything that I comment on and discuss today is just that at this

0:45 point. It's rumors. But this time, these rumors, they do appear to have legs. We might get a hint at the changes or the intent in July at the Mansion House speech. Or maybe we have to wait until the autumn budget. But something seems to be getting cooked up. So, let's start with the rumored changes before we take a look at if we think they're a good idea or not. In a BBC interview recently, Rachel said this. I'll leave it on screen so you can read it if you like, but let's just pick out a few key bits. I'm not going to reduce the ISA limit, what people can put into an ISA. A lot of money is put into cash or bonds when it could be invested. I want to preserve the 20k tax-free investment that people can make every year. I take from that that the 20k total limit that you can pay across all of your ISERS will likely be preserved. But that doesn't mean that she isn't going to reduce or tinker with the specific

1:31 limits on specific ISA types within the range. As an example, by moving the cash ISA limit down in a similar way to the fact that the lifetime ISER is part of your total 20k allowance, but has a cap of 4K a year on it. And this is the most pervasive rumor circulating at the moment. This idea of a reduction in the total amount you can pay into a cash is each year. Another one that I've seen mooted around is a suggestion that the tax breaks might be restructured. So the incentives around stocks and shares is might only apply if you have a certain portion of your portfolio invested in the UK stock market. Rachel Reeves recently got a number of pension funds to sign up to an accord where they are promising to invest a certain amount of the funds that they manage for their clients in the UK market. Maybe she's going to go for something similar on the ISA lineup side. I'll share my thoughts

2:17 on if I think these rumors are good in a minute, but first of all, let's look at why the chancellor might be considering these changes. This table shows the amount of money in billions each year paid into the different iso types. It's a slightly older table, but this is for good reason. In response to rapidly rising inflation, interest rates in the UK started going up in 2021. And as such, so did the interest rates available on cash savings, making products like cash is more attractive. But look at how from 0809 the amount of money going into cash is consistently higher than that of stocks and shares is. This is a period where interest rates and the returns you got on cash as such were next to nothing. And here is a similar bar chart but instead of the money being paid into the accounts, it shows the value of all the money in those accounts in the two main types of IS. So how much money is sat in the

3:03 actual account? Look at the stocks and shares is we pay less money in pretty much every year and yet they have more money in them. a simple yet powerful illustration of the fact that the stock market tends to drive long-term returns for investors in excess of what can be achieved through cash. Of course, cash is have a few different use cases that mean the balances might not grow. A point that I think a lot of the discussion around this is missing and we'll come on to that. But this nationwide reluctance to invest shown by our preference for cash savings is a cause that is very close to my heart. I often wonder if Martin Lewis 20 years ago had said to people, you know what guys, you should invest in the stock market. just where we would be as a country. I'm not blaming him, but I do think that we should influence people to invest more if we can. And the logic here is that a reduction in the amount

3:49 that you can pay into a cash iser acts as a sort of financial nudge in the direction towards investing. Reduce the ability to save in cash so people start to consider stocks and shares more. I also imagine that policy makers will put forward the argument that not many people use the 20k allowance, the full allowance because it's quite a lot of money understandably. So by bringing it down from 20K to 4K, we're only punishing the wealthy amongst us. I think Rachel's desire here is not just about the people though, it's political. She will hope that if she can push people into the stock market that this will lead to higher demand for UK stocks, which really have remained unpopular, unloved, and potentially undervalued for a long time now. So if we can push people in, maybe we can push prices up domestically. This will make

4:34 the UK market more attractive for international investors and also for companies that are looking for stock markets to list on. I think broadly this outcome that Rachel wants is a good one. But the rumors that we're seeing and again they are just rumors. I don't think that they're a good way of achieving these goals. First of all, if we reduce the amount of money that you can pay into a cash iser to 4K a year, that suggests that anyone paying in more than that at the minute might be wasting their money or it's not needed. And I think this ignores genuine use cases for cash is for a portion of the population. If you're in your 20s, 30s, or 40s, slapping 20k a year into a cash iser, it could be argued quite convincingly that you should consider other assets for that money to produce a better return for, you know, your long-term savings needs. But if you're approaching retirement or you're in retirement,

5:20 having a large amount of cash in a tax efficient account might not be poorly allocated investment funds, but an essential part of your retirement portfolio. This could be the pot that you're living off. It might be a cash buffer. It might be an emergency fund. It might be where you store a large portion of the money that you've just drawn down from your pension. By reducing the amount to say 4K, you limit people's ability to shelter that cash tax efficiently, and you actually just push them into a taxable position. The personal savings allowance is an allowance of interest you can earn on cash savings before you pay any tax. Currently, it sits at these levels. So, if you're a basic rate, 20% taxpayer, you can earn £1,000 a year in interest before you pay any tax on that interest. You don't need to have your money sat inside of a cash iser if you're under that limit. But for higher and

6:06 additional rate taxpayers, the amount diminishes all the way down to zero. And these people tend to require larger cash savings amounts for emergencies and such. So let's say that Rachel slams the cash ISA contribution amount down. More people will fall into a position where they're exceeding these allowances. And the cynic in me thinks really that a reduction in the cash ISA limit won't force people over to investing. It will just generate more revenue for HMRC because there'll be more people who are just forced to save their cash outside of tax efficient accounts. The financially savvy amongst you will be shouting at the screen just hold money in a money market fund inside of a stocks and shares is then or maybe premium bonds for the taxfree winnings. That's the point, right? You're the financially savvy. What the chancellor is potentially suggesting here, if the rumors are true, is that she thinks we

6:51 if we take the cash iser allowance off people that they're all of a sudden going to generate the interest, the knowledge and the trust to just put their money in the stock market instead to go, "Oh, right. Okay, well, the cash thing's gone now. I'll just stick it all in the stock market." What I think will actually happen is people who saved in cash before will continue to save in cash. They'll just save outside of tax efficient rappers and they'll end up with a tax bill as a result. So they'll end up worse off, which is the exact opposite of what we're trying to achieve here, right? If the chancellor is going to bring down cash is savings, at the very least, she needs to increase these personal savings allowance across the board for all types of taxpayers as a recognition that cash balances are not always just a misunderstanding of where the best returns are, but often an essential part of people's financial planning, especially in later life and

7:36 retirement. And I just want to challenge the chancellor to consider that those who prefer cash at the minute, are they really going to suddenly all of a sudden wake up to the benefits of the stock market or do they just see it as too risky? And really in the world that we live in, can you blame them? People are made to believe that the only way to invest is through the help of a professional or a financial adviser. But the advice gap means that 90% of the UK population will never be able to afford or qualify for that advice. And in the meantime, we advertise crypto on the tube, casinos on football shirts, and Greg Scka. This guy is a household name. If you didn't know his name, I know you know his face. Financial disclaimers by their very nature tend to paint investing as a very risky endeavor. Reeves is working with the financial regulator looking at ways to incentivize investing. One suggestion that I've seen

8:23 emerge from this is the loosening of advertising rules so that brokers with cash ISO offerings can advertise their stocks and shares ISO offerings to those clients in an attempt to pull them over. I think the regulator has an important place here in terms of getting the nation investing. But I also think that we're missing out on the really big lever. I don't understand how I live in a country where we have little in the way of financial education at school. Even though we know through multiple academic studies that financial literacy improves the health, wealth, and happiness of the people who learn it. Our system goes, instead, let's prepare young citizens for adulthood by teaching them absolutely nothing about the one thing that they will spend 70% of their waking existence in pursuit of. Once you finish that education, you enter a world where the marketing is targeted at financial activities that are predatory. Clown, credit cards, and car finance. I

9:09 remember being so excited one day at the age of 18 when a credit card came through the post for me, holding it in my hands and thinking, I'm an adult now. It took me years to get out of the mess that that car put me in. People should be buzzing instead at that age about making their first stock market investment. There is a silver lining to all of this, though. 38% of 18 to 25 year olds in the UK report to holding investments. This is the highest proportion of all age groups. I wonder why the generation most likely to seek out information on social media are participating in investing at a higher rate than other generations at the exact same point that financial influencers like yours truly are exploding in popularity online. Meanwhile, previous generations are sat at home watching loose women thinking that changing bank accounts and switching energy suppliers is the key to a comfortable retirement.

9:56 Elimination of cash ISA benefits without proper education of the alternatives is pointless because people aren't suddenly going to go, "Oh, well, that door's closed off to me now. I wonder what's behind this one." I hope Rachel knows she can't just force the British public into the action, into the behavior that she wants here. This isn't autoenrollment pensions where you can, you know, just put people in them and they'll stick around. You need to convince people that investing is a good thing for them so that they do it. In the same way, the mandation of purchase of UK assets, the rumor being hinted at here, is not going to make more people start investing. Making the stocks and shares ISA more complex is not the solution to making the UK market more attractive to invest in. 16% of adults have a stocks and shares Iser. 1/5if of Brits have never even heard of them. Meanwhile, 31% of Brits have a cash Iser. So, it's still the case that the

10:41 majority of people in the UK do not have any Iser at all. And there's going to be a lot of crossover there because people with stocks and shares is will also have cash is. So the total amount of adult population with an ISA product will be smaller. Instead of going to that 16% that have a stocks and shares ISA, you now have to buy a certain amount of UK assets to get the benefits. Let's just focus on increasing the total amount of the UK population that invest overall. Mandating a certain percentage to that 16% will be less impactful to the UK market than if we got that 16% to 55% like it is in America. We need to make this simple. Make the products simple to use, simple to understand, make the benefits of the stock market clear and simple to people. And the very worst thing that you could do in my opinion is make the rules more complicated or more

11:27 worryingly, more worryingly, sorry, change the rules around ISIS so that people think, you know, these can be messed with. I recently interviewed Lord David Willlets. He's part of the Resolution Foundation, which is a think tank. The Resolution Foundation have been in favor of drastic ISA reforms, including capping them at £100,000. These guys have a lot of influence. Torston Bell was the former chief executive and he is now an MP and holds a position at the Department of Work and Pensions. He will clearly be influencing policy and ideas. I pointed out to David that I thought that changing the rules around products such as ISIS that are designed for people to save for a long period of time is disastrous when it comes to consumer confidence. We've seen this in the pension space, right? The moving of the goalpost constantly has created this genuine pension fear and

12:14 mistrust of the system for many. ISIS are an alternative where people go, "Well, at least I know the rules here." If you change the rules and you make these products worse, you break the sanctity. You break the trust in ISIS and you open the door for future governments to dip into them further because they just can't resist once the precedent has been set. You take one of the most popular retirement savings products and you make people question, can I trust this? At a time when really what we need to be doing is encouraging people to save for their retirements, not generating more question marks around it. What my conversation with Lord Willlet showed is that policy makers are often out of touch with how the public feels about things. And when you said people don't trust their pension and the governments mess around with them, I think read the comment sections. Honestly, I mean, I'm coming from the perspective of a million people a month tell me what they think about

12:59 pensions and they don't trust they don't trust that politicians won't move the goalposts, whereas ISIS, the rules are very defined, you know. I mean, that's interesting. I mean, this is a very that you're making a powerful point. Credit to Lord Willis. He took on board the feedback. But I really worry how in touch Rachel is here. I hope these rumors that we're seeing are just some of the worst of the noise. and that behind the scenes she's sensibly considering how do we get the British public behind investing as something that is good for them and not something that you know we have to force them into doing it by taking away other benefits elsewhere and I hope she's listening to a broad range of voices as well and not just fund providers with a vested interest or financial lobbyists with all the power if I was looking at some simple ways to promote investment broadly across this nation there needs to be a nationwide education campaign along the lines of Telid from the 80s

13:45 you know these British gash They're really easy to do. Give them a ring. And for the kids, we should weave financial literacy into the current school curriculum everywhere possible. Within maths lessons, teach compounding returns and inflation within history. Talk about the financial markets. Tell kids about the financial crisis and what it did to this country. And if you want to promote investment in UK companies specifically as well, get rid of stamp duty on the purchase of UK shares. Just a couple of ideas off the top of my head, but the most important thing about them is investors and the public feel like they gain from them, that they produce a positive outcome, where a lot of the suggestions that we've looked at today really, they feel like they're taking away from the public, like we're worse off after them. Please leave your thoughts below so I can share them with my political connections and just try

14:30 and get our voice in front of Rachel the chancellor if I can because I believe that we the consumers of these products the people that are literally pinning our financial futures on them deserve a say in how they operate and for some reason you know our voices are often ignored. I think I think that this is the thing that like what what people don't realize about social media is it's social. It's social media. There's a comment section and you can ask a question of the audience and they will give you lots of answers and you will find highly intelligent people giving really wellthoughtout arguments or discussion. And