In his recent Budget, chancellor Jeremy Hunt unveiled the UK Isa.
This new savings account allows individuals to invest an additional £5,000, tax free, provided it is allocated to UK equities. The idea is to stimulate investment in domestic firms.
But, while the intent is laudable, the approach is misguided.
Figures bandied about in the run-up to the Budget suggested the UK Isa could “raise £200bn for UK PLC over five years”. This is misleading.
In the US, people see investing as a savvy means of growing wealth. In the UK, many see it as akin to gambling
While the UK Isa may facilitate the movement of funds into the equity market, it does not equate to a direct financial boost for UK PLC. The distinction between investing in shares and providing capital to companies is crucial to understanding the true economic impact of this savings account.
The figure of £200bn is also a ridiculous over-estimate. It relies on the idea that, if cash savers invested £5,000 into UK companies, it would deliver that sum.
This assumption draws on Financial Conduct Authority data indicating that 8.4 million people possess £10,000 or more in cash assets available for investment. So, if each were to invest £5,000 in the UK Isa, it could potentially generate £42bn for UK-listed companies in the first year. Over five years, this could amount to £210bn.
Lack of incentive
But there is little incentive for these individuals to invest so heavily in UK equities, especially for those new to investing.
Currently, only 15% of Isa investors are maximising their contributions. And those who haven’t reached the £20,000 cap can increase investments in their regular stocks-and-shares Isa, including the option to select
UK funds.
It’s time for a bold, nationwide campaign to ignite the public’s financial acumen and truly unlock Britain’s economic prowess
The proposed £5,000 UK Isa increase is targeted at a narrow audience: those already contributing the maximum. Based on the latest Office for National Statistics data, and assuming the 1.6 million individuals who fully utilise their Isa allowance will
take advantage of the additional £5,000 allowance, the UK Isa could potentially generate around £8bn annually.
No small sum — but it pales in comparison to the potential collective benefits of getting the vast sums currently dormant in cash accounts into the broader UK market.
By advocating for broader participation in long-term investments, we can stimulate a shift towards greater financial security, far exceeding the effect of a few individuals increasing their investments in UK equities alone.
In the US, people from all echelons of society see investing as a savvy means of growing wealth. In the UK, many see it as akin to gambling. A radical change in the national conversation about the benefits of investing is therefore necessary. This could empower the public to take charge of their financial future while contributing to the nation’s prosperity.
We must provide the nation with the building blocks required to create the level of wealth needed to raise a house deposit
Take the rhetoric around property. Homeownership has long been extolled and promoted by UK governments as an instrument for social advancement, and a fundamental element of familial security. This has cultivated a national obsession, with getting the keys to your first place regarded as a rite of passage. However, homeownership remains an elusive dream for many.
To change this, we must provide the nation with the building blocks required to create the level of wealth needed to raise a deposit.
Public awareness
The most impactful long-term savings policy of late has been pensions auto-enrolment — a strategy designed to get us saving despite our inertia, rather than tackle the root cause of finance apathy. Instead of getting people to think about long-term saving, auto-enrolment means we save on an involuntary, rather than elective, basis.
Outside finance, public-awareness campaigns around the dangers of drink-driving and smoking have been enormously effective in changing behaviour.
The UK Isa may facilitate the movement of funds into the equity market but it does not equate to a direct financial boost for UK PLC
Something similar, highlighting the risks of inflation eroding the real value of money, could be equally transformative, steering the public towards safeguarding their financial future.
The UK Isa is a political charade that does little to address the underlying issues or spark a true investment revolution.
Instead, it’s time for a bold, nationwide campaign to ignite the public’s financial acumen and truly unlock Britain’s economic prowess.
Steven Levin is CEO of Quilter
This article featured in the April 2024 edition of MM.
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