Martin Lewis gives alternative to Rachel Reeves' 'unfair' Cash ISA change

Martin Lewis has shared problems with Rachel Reeves' reported new plan to slash the limit on Cash ISA. Reports have suggested that Reeves is set to announce the lowering of the tax-free savings limit at her Mansion House speech on Tuesday, July 15. The reported plan to cut the limit has already been met with criticism as one building society said that it will have the biggest negative impact on older savers.

The limit is currently £20,000 per year, which savers can put away tax-free. The move is said to be made in a bid to encourage more investments, but experts have warned that this will have an adverse effect on moderate and older savers who are looking for a more sensible, risk-free saving method. Martin Lewis has criticised the plans and called them "unfair", doubting that this cut on the Cash ISA limit would actually encourage people to invest more. "The thought behind cutting the cash ISA allowance is to encourage, especially younger people, to invest instead via stocks and shares ISAs," he explained.

However, he said that it is "unlikely" to work and that it is "unfair" to deny older savers the safety of a Cash ISA while trying to nudge younger people to invest.

He came up with his own concept that he thinks would be a great alternative to Reeve's current reported plans. He suggested that the chancellor introduce a new 'starter investment ISA' in which savers could put up to £1,000 with the state adding on 5 per cent with that money being kept in investments for a fixed period of time, such as a year.

"This is a sweetener to encourage people who've never invested to dip their toe in the water," he said. "Part of the issue is lack of education and guidance about risk or reward and investing, so doing this would enable it to be more talked about, and let people take the plunge with less risk (some risk is offset by the 5%)."

He added: "It would be set up so you could use the same account to invest in a standard investment ISA too. So people can seamlessly add more funds to it (no bonus over the first £1,000 though)."

Lewis explained that it could be capped at a certain age, such as 40, similar to Lifetime ISAs.

Reports suggest that the £20,000 annual limit is to be brought down to just £5,000, as this more accurately represents a "rainy day fund". Reeves believes that more savings moved into Investment ISAs would give the British economy the supercharge it needs.

Henrietta Grimston, Financial Planner at Saltus, said: "Reducing the allowance risks penalising these sensible savers, making it harder to build tax-efficient pots for the future. As people approach retirement, or other significant milestones where they need to access capital quickly, this could create a bigger savings burden, with tax taking a greater bite out of any growth."