A recent report by the Resolution Foundation entitled “ISA ISA Baby” proposes that the UK’s low levels of household savings be remedied by revising and expanding the Help to Save government scheme. The authors argue that this could be funded by capping ISAs at £100k which, in their eyes, “largely benefit the already wealthy”. While the report’s diagnosis of the problem is broadly correct (low levels of savings, poor take up of Help to Save, etc.), the capping of ISAs is ill advised.
A few brief observations:
When looking at ISAs we must ask ourselves what exactly constitutes ‘rich’ or ‘wealthy’? Does an earner in the top 10th percentile of the income distribution automatically qualify as ‘rich’? What about dependants or family members who rely on them for financial support? Some of them may indeed find themselves in difficult situations such as poor health or personal loss – does this so-called ‘high earner’ sound like someone likely to be splurging money? What about a family of four that after years of hard work managed to save £100k in ISA savings – does this qualify them as ‘rich’?
The reality is that the top 10th percentile of earners are not the rich or wealthy but are the very drivers of middle-class Britain. They are the small and medium business owners, the managers, the directors, the forward-thinking entrepreneurs, the doctors, the lawyers, the university professors, the scientists, and so on. They represent a key part of the fabric of society and cumulatively form the central force that moves our economy forward. Penalising them for hard work and demonstrating financial prudence sends all the wrong messages about what Britain values as a nation. We should rather be encouraging the aspirations of all to save.
Let’s not forget that for many ISAs are not extra pots of disposable cash but often represent entire lifetime savings. ISAs are used by many as an informal private pension – should a couple approaching retirement with £100k saved throughout their working lives be considered ‘wealthy’ and in need of extra taxation? This equates to a supplement of roughly £4,000 per annum which by any estimation, is hardly ‘rich’. In addition, the cap can be seen as a form of double taxation since funds placed in ISAs largely come from earnings where tax has already been paid. Then of course you have to account for the inevitable unintended consequence that those with £100k+ in ISAs will simply move their money elsewhere (the pensions – buy to let debacle springs to mind).
A comprehensive picture behind ISAs is therefore complex and intricate. With living costs at the highest level in half a century, families with life savings of £100k are not rich but very much middle-class. They have some limited financial buffer for life’s unforeseen eventualities and targeting ISAs would compromise this much-needed savings vehicle. The truly wealthy are more likely to have a Swiss bank account or trust fund – they do not rely on ISAs. A recent article in The Times reported that even among the ‘super-rich’, the UK’s appeal is unfortunately diminishing with over 1,400 millionaires having left the country in 2022 alone.
In The UK Savings Crisis: Rediscovering the Principle and Practice of Saving, I spoke about the need of promoting key societal virtues such as prudence and cultivating a broader culture of saving. This starts with early education and continues well into working adulthood. Unfortunately, our educational system does virtually nothing with regard to equipping students in basic financial budgeting and planning. It should therefore come as no surprise that government schemes such as Help to Save suffer from poor adoption rates – less than 1 in 10 eligible have signed up to the scheme. The wider picture, of course, points to a combination of associated factors: a lack of awareness and understanding of the scheme, burdensome red tape and bureaucracy and long wait times for the funds to be released (two tax-free bonuses of up to £600 each over 4 years with the initial bonus to be received only after the first 2 years have elapsed). All these make for a rather unappealing proposition for struggling families that are more focused on paying the bills at the end of each month than waiting two years for a maximum £600 government bonus. So schemes that encourage savings do indeed need to be reformed and made more accessible. However, these changes needn’t come at the expense of restricting or capping ISAs.
Policies in the sphere of savings have the dual challenge of not only assisting those on low income but also promoting a wider environment where hard work and prudent financial behaviour is rewarded and encouraged. People’s innovative spirit, determination, resilience, and discipline should not be penalised through additional thresholds of taxation.
Capping ISAs at £100k certainly generates headlines (and entertaining reactions on YouTube), but what is the real cost if it leads to lousy policy? Those of us in the think tank world need to step back for a moment, look beyond the mere numbers and ask ourselves: what are the wider societal implications of our proposals and what specific moral virtues are we trying to encourage in the long run?
Andrei E. Rogobete is Associate Director at the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.