Cutting cash ISAs is far from only option for encouraging savers to buy stocks and shares: Rachel Springall

The Financial Times has recently reported that Chancellor Rachel Reeves is due to announce plans to cut the annual tax-free cash Isa allowance in her Mansion House speech on July 15 in an attempt to boost the stock market, though the precise change to the current £20,000 limit is reported to still be under negotiation.

Ms Reeves has previously told the BBC she does not plan to reduce the overall £20,000 limit for ISAs but there is speculation that the cash element could be limited from its current level to encourage savers towards stocks and shares ISAs.

However, there will be many savers who just do not want to invest their cash on the stock market, so any reforms must be considered carefully.

Slashing the cash ISA allowance could also raise mortgage costs, with various mutuals making it clear how vital cash ISAs are as a source of funding, which will cause chaos in the housing market.

Clearly, there will be consequences if any cut to the cash ISA allowance has not been thought out thoroughly.

One way that the government could encourage saving in a stocks and shares ISA would be to offer a short-term government bonus for investing in UK stocks, like they do to entice savers to take out a Lifetime ISA.

However, to attract savers to UK stocks there could be reductions on management fees for investing in UK funds.

Ultimately the government has a goal to stimulate growth, but they must not penalise savers who have no desire to invest.

It’s vital that they tread carefully with any reforms and ensure they review the financial education surrounding investing to protect consumers.

If they were to launch a campaign to encourage investing, people must be conscious of the benefits but also the risks.

Many savers are fearful of stocks plunging and losing a portion of their original investment, but if they invest for the longer-term its often the case that stocks can perform better than the returns earned on a simple cash ISA.

Labour introduced ISAs over 25 years ago and the aim was to encourage people to save or invest their money, free from tax.

Should the government review how tax could work on individuals with big ISA pots, the money earned from tax could then be spent on other initiatives, such as the Help to Save scheme.

However, many retail banking institutions have objected to changes, saying a fall in limits could impact their ability to issue mortgages and other loans.

Although, there was a time where the cash ISA limit was much less, but of course that was over a decade ago.

Millions of consumers are expected to pay higher-rate tax at 40 per cent this tax-year, so those who unexpectedly breach their Personal Savings Allowance (PSA), which allows basic rate taxpayers to take home up to £1,000 worth of savings interest tax-free each year but only £500 for higher rate taxpayers.

Rachel Springall is a finance expert at Moneyfactscompare.co.uk