State pensioners are set to lose out if Labour goes ahead with plans to cut the limit on cash ISA deposits.
Chancellor Rachel Reeves is reportedly considering reducing the annual savings limit on cash ISAs after meeting with senior City executives.
It is understood that Reeves discussed how to encourage people to invest more money in stocks and shares, and one idea is to reduce the savings threshold of ISAs.
After the meeting, Reeves was reported to be considering implementing a tax-free allowance of just £4,000 on cash ISAs, which is a fifth of its current amount.
At the moment, savers are allowed to protect £20,000 of their money from tax each year.
Speaking about the potential limit on Thursday, Reeves told broadcasters: “It’s really important that we support people to save to achieve their aspirations.
“At the moment, there is a £20,000 limit on what you can put into either cash or equities (ISAs) but we want to get that balance right. I do want to create more of a culture in the UK of retail investing like what you have in the United States, to earn better returns for savers.”
More than 18 million people hold savings in a cash ISA and the £20,000 annual limit has been in place since 2017, before which it was set at just £3,000.
But experts warn that if the limit is reduced to £4,000 then pensioners would lose out, as elderly savers may be unable to afford higher-risk alternatives, such as stocks and shares ISAs, and instead rely on cash ISAs to give safe returns on their savings.
While a stocks and shares ISA does have the potential to offer better returns in the long-run compared to saving in cash, the money you invest is linked to the performance of the stock market and so it does carry more risk.
There is always the possibility that the stock market could suffer a crash which would impact your savings, whereas with a cash ISA, there is only inflation to contend with and this can be compensated by interest.
Savings providers have said they are preparing to fight any move to bring down the deposit limit on a cash ISA.
Sarah Coles, of Hargreaves Lansdown, told The Daily Telegraph: “We have clients opening stocks and shares ISAs after the age of 100.
“However, retirees need to hold more emergency cash because they tend to be on lower fixed incomes, so have less wiggle room when they’re hit by the unexpected. It means cash ISAs can be particularly rewarding as we get older.”
Ed Monk, of financial services firm Fidelity International, added: “Ending Cash ISAs would be very unpopular with those savers who currently enjoy the tax-free returns they offer.
“These might include people who do not want to risk losses from investments, and perhaps those in retirement who do not have long time horizons which can help reduce the risk of sudden investment losses.”
