Savers who have built up billions of pounds in cash individual savings accounts (Isas) are set to be given new freedoms to switch their money into higher-risk stocks and shares Isas without losing their tax benefits.
The changes, revealed this week by economic secretary, Ed Balls, are intended to breathe new life into equity ownership and encourage savers to diversify their assets.
The changes are all part of plans by the Treasury to simplify the rules surrounding Isas.
Balls said Isa holders will now be able to transfer any cash savings they have built up from previous years’ allowances into stocks and shares Isas without affecting their annual investment limit. Investors will also be able to transfer any new cash savings into equities in the future. They will not, however, be able to transfer any Isa funds invested in equities back into cash.
Savers will be able to transfer their cash funds away from their current Isa provider when they swap into stocks and shares.
The investment industry welcomed the changes. Stephen Haddrill, director general of the Association of British Insurers, said: “We have been pressing the Government to provide an environment that encourages people to save, whether for long-term needs like retirement, or for the shorter-term. This is positive news for savers, and shows that the Government is working towards simplifying the regime while providing greater flexibility and choice for savers.”
Gavin Oldham, chief executive of stockbroker The Share Centre, said: “This is excellent news. Most Isas are viewed as long-term investments and on this basis investing in the stock market should generate the best returns.”
Darius McDermott, managing director of Chelsea Financial Services, the adviser and discount broker, echoed this, saying: “Cash is not an effective option for long-term saving so having the flexibility to move into equities without losing allowances is good news.
“People’s circumstances change over time and this allows them to invest in cash as a safe haven knowing that they can take more bullish decisions when they want to invest on a longer-term basis.”
However other financial advisers questioned whether there would be an appetite among savers to switch from cash to equities as they said people who had deliberately chosen to keep funds in cash probably did so for a reason.
Advisers generally recommend that you keep between three and six months’ of your salary as an emergency cash fund.
Cash-Isas have proved far more popular than equity Isas in the past. There is currently £111bn invested in cash Isas, compared with £70bn invested in equity Isas, even though the cash component has lower investment limits. When Isas were launched in 1999, equity Isas accounted for 56 per cent of all Isa subscriptions. However, many equity investors who had their fingers burnt in the stock market downturn have been hesitant to return to equities.
Justin Modray, at Bestinvest Brokers, said: “What Mr Balls really needs to address is switching from stocks and shares Isas into cash Isas. It is common to invest in stock markets while you are younger and then switch into cash later in life.”
Isa providers also called for the Treasury to go one step further and increase the annual Isa allowances.
“We still feel that the annual limit must be reviewed in order to encourage a higher level of long-term savings,” said Richard Wastcoat, UK managing director of Fidelity International. “This is critical to ensure that people make adequate provision for their financial needs later in life.”
