Could ISA Reforms Potentially Destabilise the Market?
Rachel Reeves has signalled that changes may be coming to the ISA market. The potential change that's grabbed the headlines is potentially reducing the cash ISA savings limit, to enourage people to invest in stocks, but another mooted plan is to allow savers to hold MORE ISAs in total.
At face value this proposed change seems to simply offer savers more choice overall, at least more choice over stocks and shares ISAs, even if the total amount they can save in a wider variety of cash ISAs is more limited.
The Treasury predicts that up to £5 billion of additional ISA deposits will be made annually as a result of the reforms. This could be a welcome shot in the arm to a flailing UK economy, as people chase tax free returns on stocks.
The downsides....
It's only the top 10% or so of people that are going to be able to benefit from this expansion if the ISA limit on stock investment is raised, while the middle-rich who prefer the stability of cash may well lose out if they don't want to risk Vesting in stocks, they'll have to pay more tax on their cash savings in the future which will have to be in regular bank accounts.
There is also the potential problem of increased volatility. If people start more and more shuffling money between ISA providers to find the best deal, the financial system can be subjected to unwelcome turbulence.
And of course there may be certain people who will be excluded from this kind of Vesting opportunity. The digitally illiterate who prefer cash won't be interested in stocks at all probably!
Final thoughts...
On balance i'm still all for increased choice of ISA VESTS, I like a little bit here and a little bit there, i.e diversification!
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I'm nowhere near maxing out my ISA limits. I ought to put more in really. As you say, this affects a minority. They need to do more for the people who cannot afford to save anything.
You have to be pretty flush for maxing that limit to be a concern, especially if you're working age when SIPPING is probably a better option!
Diversification is important, but we must make sure that every saver has the same access to opportunities without being pushed into high-risk investments.
I had to look this up, because in US we don’t have anything similar to ISA. As I understand it you can contribute a max of 20K pounds tax free to ISA.
I think the closest we have is a ROTH-IRA.
That's basically it, the problem with them is cash ISAs tend to have good interest rates for a year then they reduce drastically.
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Indeed the middle class will suffer that fate. Also an opportunity for them to think long term elsewhere like crypto markets. About those not exposed to the internet, a big bridge to climb from here
I'm not sure I understand how investing in the stock market will grow the economy? On the whole these are not new shares issued by companies to raise money to do something (I don't know - fund research, build a new bit of infrastructure, increase skills), they're second and third hand onwards exchanges
Hmm yes fair point, but rememner economic growth has very little to do with anything tangible these days!