Should Cash ISAs Tax Free Limit Be Cut to £10,000?

The UK government is mulling reforming the Individual Savings Account (ISA) scheme with the potential to cap the cash ISA ceiling at £10,000. The move aims to encourage increased investment in stocks and shares ISAS, thus stimulating economic growth.

Currently, there's a £20K tax free limit on ISAs in total, the mooted change is to split this between cash and stocks, £10K each.

Benefits of Reducing the Cash ISA Restriction

The headline advantage is that this should encourage Vests in companies...

And this might steer people into a win... Historically, equities have performed better than cash savings in the long run. For instance, a £10,000 investment in the IA Global Equity index since December 2012 would be worth approximately £33,526 today, compared with £11,955 in a cash ISA, which, if inflation is adjusted for, amounts to just £7,918. Investing money in stocks and shares ISAs may contribute to individual wealth and boost economic growth.

If this move had been done 10 years ago, it could have steered people into profit, rather than loss.

And there's a knock on effect, that Vestment in companies can drive innovation too.

This alteration might also make individuals seek financial advice and education, and increase financial literacy.

Drawbacks of Reducing the Cash ISA Threshold

The majority of individuals, especially pensioners and pensioners-to-be, favour the safety net of cash ISAs. A reduced cap could urge them towards riskier investments that may not necessarily be appropriate for their financial goals or risk tolerance.​

Building societies use cash ISA deposits to support their mortgage lending. A significant fall in such deposits would increase mortgage costs and reduce the ability to lend, affecting the housing market.​

And then there's the fact that some people might just lack the mental capacity to understand the risk balance of stocks ISAs.

Final Thoughts...

Personally I'm in favour of shifting the cap... £10K interest free is still fine, imagine another £10K not interest free, even at 5% per annum you'd only be paying 20% tax on £500 anyway, that's £100 a year.

Compared to the relative gains you could make in a relatively low risk stocks ISA, it'a almost like a moral duty to make the shift!

Posted Using INLEO