Seeking comment: Cash ISA cut ‘unlikely to have significant impact’ on economy

The problem with this policy is that it assumes reducing access to cash ISAs will automatically create investors. It won’t.

People hold cash for reasons: emergency funds, house deposits, planned spending or simply because investment risk is not appropriate for them. Someone who does not want to invest £8,000 is unlikely to suddenly buy shares because the Government has reduced their cash ISA allowance. They may simply use ordinary savings accounts, Premium Bonds or spend the money instead.

That helps explain why the wider economic impact is expected to be limited. The overall £20,000 ISA allowance remains, but only a relatively small group currently puts more than £12,000 a year into cash ISAs, and even within that group behaviour will vary.

If the Government wants more people investing, financial confidence and education are stronger levers than restricting where people can save. You cannot manufacture risk appetite through an ISA rule.

This is not a well-thought-through way to get Britain investing. HMRC’s own figures show 78% of under-65 cash ISA savers already put in less than £12,000 a year, so the policy only directly affects a minority. More importantly, cash and investments serve different purposes. Someone building a house deposit or holding money they need in the next few years should not be pushed into the stock market simply to keep a tax wrapper. Many will instead use taxable savings accounts or other cash products, then spend that money as planned. I don’t think reducing choice suddenly turns cautious savers into investors. If anything, adding another limit makes ISAs more confusing. If the government genuinely wants more people investing, improving financial confidence and education would be far more effective than penalising people for holding cash.

This is such a blunt stick approach to blugeon people into investing but it will only work if people have the confidence to invest. The carrot part is completely missing. I suspect that the behaviour shift of this policy will be to use up the cash ISA limit and then build up cash savings in taxable savings accounts.

HMRC expects little macroeconomic impact because the policy touches relatively few people. Nearly four in five under 65 cash ISA savers already contribute less than £12,000 a year, so for them nothing changes.

Of those affected, some will invest the excess, but many hold cash because they value certainty and liquidity, not because the ISA rules make them. Cutting an allowance doesn't turn a saver into an investor; much of the money will simply drift into taxable savings accounts, fixed term savings, or Premium Bonds.

There is also a danger in nudging naturally cautious savers into risk. Investing suits long term money, but it is no substitute for emergency savings or cash needed within a few years.

The policy may shift some money into markets, but it won't transform Britain's investment culture. If that is the goal, a carrot would be more effective than a stick.