Reeves U-turns on plans to slash the cash Isa allowance. What's next?

With every day and night of her Chancellorship that goes by, Rachel from Accounts is transmogrifying into U-turn Rachel.

And after politically embarrassing turnarounds on cuts to both the winter fuel payment and out-of-control disability benefits, U-turn Rachel is at it again.

This time, it’s over her planned trimming of the annual cash Isa allowance, details of which we had been told for weeks would be spelt out next Tuesday at the Chancellor’s Mansion House speech in central London.

Now, according to Treasury officials, there will be no confirmation of a cash Isa haircut in her speech to the City’s great and good after all.

Why? Further consultation on any Isa overhaul, we have been informed, is required. Details of any haircut is postponed for another day.

So, for the time being, there will be no reduction in the annual cash Isa allowance from £20,000 to £4,000 as we had been widely told to expect. Triple U-turn Rachel. Enough to make her (and us) feel rather dizzy.

Of course, this is not a U-turn on the epic scale of those done on winter fuel payment and disability benefits. It’s more a shift of position with regards to an anticipated policy.

Yet, it chips away at the Chancellor’s authority and begs serious questions of those in the Treasury who advise her on policy.

Let’s be honest. Cutting the cash Isa allowance as a way of nudging more savers to become (Isa) investors – the Chancellor’s grand desire – was a policy dreamt up in the Treasury madhouse.

Millions of people save – rather than invest – for a purpose and there is currently no better tax-friendly home available than a cash Isa where interest rolls up free of nasty income tax.

Savers put money in a cash Isa for a rainy day or a financial emergency; to build a deposit to put down on a first home; or to ensure their retirement is not undermined by financial insecurity.

They have no burning – or latent – desire to risk their money in the UK stock market as Ms Reeves hoped they would if the Isa rules were changed to encourage investing over saving. They are fundamentally risk averse.

Most of the surveys conducted in the past few months on the proposed changes pointed to the ludicrousness of Ms Reeves’s Isa grand plan.

For example, research conducted by investing platform AJ Bell indicated that only one in five cash Isa savers said they would put money into the UK stock market if they couldn’t put it into a cash Isa. A majority said they would put their money in a taxable savings account instead.

Ms Reeves and her Treasury advisers also failed to understand the key role that cash Isas play in the wider economy. It’s an argument that the trade organisation for building societies and credit unions – the Building Societies Association (BSA) – has articulated rather splendidly in recent months.

Although conservative by nature, the BSA has played a blinder in spelling out to the Chancellor the unintentional economic consequences of curbing cash Isas.

In two letters to U-turn Rachel – the first in February this year, the second earlier this week – BSA chief executive Robin Fieth warned that any reduction in the annual allowance could result in a mortgage shortage, increase the price of loans, and trigger house price falls.

In other words, by discouraging cash savers, the Government would be compromising the ability of building societies (and to a lesser extent banks) to raise sufficient funds to meet the demand for loans from home buyers and small businesses.

The future of the £20,000 cash Isa allowance is far from guaranteed. Further consultation may still result in it being given a snip, but we will probably have to wait until the Autumn Budget to learn of its fate.

Yet I do hope Triple U-turn Rachel will metamorphose back to Double U-turn Rachel and keep the £20,000 cash Isa allowance.

There are far better ways to encourage more people to invest in Isas – such as the abolition of stamp duty on share purchases made inside an Isa and greater financial education on the long-term benefits of investing.

What I find most discomforting about this whole cash Isa debacle is the adverse impact it has had on savers, especially the elderly.

Rumours of an impending allowance cut in the past few months, perpetuated by Treasury officials, has caused widespread anxiety among readers who depend upon their cash Isas to provide them with a vital tax-free financial buffer in retirement. This is no way to conduct government policy – and no way to treat the elderly.

Sadly, speculation on what the Chancellor will do to our savings, pensions, investments and wider wealth in the Autumn Budget has only just begun. We have three and a half more months of it ahead of us.

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Opinion: Labour is coming for your money

Already, rumours have been flying around about a cut in the tax relief we receive on payments into our work or self-invested personal pensions. A flat rate of 20pc tax relief on pension contributions could well be on the cards as opposed to the current system where higher and additional rate taxpayers enjoy 40 and 45pc relief.

Also, the rumour mill on a possible jaw-dropping reduction in the maximum amount of cash that we can take tax-free from our pension is starting to go into overdrive.

There is now widespread talk of a £100,000 cap, compared to the current rules that allow most people from age 55 to take 25pc tax-free cash subject to a maximum cap of £268,275.

There will be more for sure: speculation about higher taxes on capital gains and inherited wealth – and a possible wealth tax on the country’s wealthiest individuals.

For the greater financial good of households up and down the country, I think Treasury officials worth their salt should do a U-turn of their own.

Between now and the Budget, they should start dispelling those rumours about future tax changes that lack any substance (especially when it comes to pensions) – rather than allowing them to linger and nudging some people into making financial decisions they will later regret.

It’s the least the public deserves.