S Poddar
Scrapping tax reliefs on cash ISAs could disproportionately hit conservative retirees, costing them thousands in the next five years.
Rachel Reeves is under pressure from City firms to reduce lavish ISA tax reliefs and send the money elsewhere to spur economic growth. The Treasury has so far refused to rule out the possibility, and it has alarmed savers, especially pensioners who have cash ISAs as a risk-free investment option.
Wealth managers warn that stripping or cutting tax relief on cash ISAs will most severely impact retirees. Savers in later life tend to opt for low-risk investments to secure their money, and the elimination of these tax benefits could severely dent their income.
Based on analysis by wealth management company Quilter, a standard-rate taxpayer with an average cash ISA balance of £42,243—a typical amount for those aged over-65—would pay an additional £2,080 in income tax over five years if the accounts were closed. The effect is even more pronounced for higher-rate taxpayers, who would pay an additional £4,160, while additional-rate taxpayers would have their tax bill increase by £4,680.
Cash ISAs have been a favourite of retirees for years, offering a tax-free haven for savings interest. During the 2021-2022 tax year, the latest for which figures are available, 3.8 million cash ISAs were in possession of savers aged 65 and over.
Under the current rules, individuals can deposit up to £20,000 annually into a cash ISA, with any interest earned remaining tax-free. However, successive governments have already chipped away at these benefits by freezing the £20,000 allowance since 2016, a policy set to continue until at least 2030.
Earlier this month, the Chancellor was called on by financial institutions to reverse cash ISAs, claiming that the £300bn held in them could be better utilized by moving to riskier stocks and shares ISAs. Supporters of the move claim that incentivizing investment in equities could return more to savers while directing money into British companies, which would help stimulate economic growth.
Government ministers seem open to restricting cash ISA tax relief. City Minister Emma Reynolds recently asked why “hundreds of billions of pounds” were sitting in cash ISAs, implying that the UK has not developed a more mature investment culture. Her remarks reflect wider government fears about encouraging more savings to go into productive investments.
Reeves has already expressed herself in favor of capping ISAs. Writing for The Independent in 2016, she suggested a £500,000 lifetime limit on ISAs. Labour’s new pensions minister, Torsten Bell, previously headed the Left-leaning Resolution Foundation, which has campaigned for a far tighter cap of £100,000.
While supporters of cash ISA tax relief reduction claim that it may bring improved long-term financial gains and overall economic benefits, detractors caution that it may punish cautious pensioners. Most retirees depend on these accounts to secure their finances, as they value the security of guaranteed returns over the uncertainties of the market. For them, the loss of tax benefits is not merely a theoretical policy shift but an actual personal loss that can affect their standard of living during retirement.
With the debate raging over cash ISAs, pensioners and savers will eagerly await whether or not the government will go ahead with the planned changes. For now, the uncertainty puts millions of risk-averse investors in limbo, with their futures in doubt over their hard-worked savings.
