Chancellor Rachel Reeves is at risk of “squandering” much-needed reform to ISAs during her upcoming Budget, analysts claim.
The Treasury has came under fire over reports Ms Reeves will extend the current tax threshold freeze with critics referring it to a “stealth tax”.
Savers have found themselves paying more tax on earned interest thanks to fiscal drag with analysts urging the Chancellor to consider alternative reforms to the savings regime.
A behavioural study involving 2,400 participants has found that integrated ISA accounts significantly reduce investment hesitancy among UK savers.
This research, conducted by academics Dr Richard Whittle and Dr Stuart Mills, indicates that combined accounts increase satisfaction with returns and reduce the likelihood of panic selling during periods of market volatility.
The study comes as the Government is reportedly considering reducing cash ISA allowances, in what some analysts are referring to as a stealth tax.
AJ Bell argues that any such reduction would create additional barriers for savers and make it harder for people to transition from cash holdings into investments.
Britain’s current ISA structure requires savers to choose at the outset between separate cash and investment products.
Combined accounts boost investor confidence and curb reactive selling, according to the study
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The system’s fragmentation often results in individuals defaulting to cash-only options due to the complexity of weighing risk against security at the point of purchase.
In the behavioural trials, participants were split into two groups. One group viewed the existing system, in which cash ISAs and stocks and shares ISAs operate as distinct accounts.
The other group was shown an integrated structure where cash and investments existed as separate components within a single ISA account. This unified model was designed to remove the immediate binary choice that characterises the current approach.
Dr Whittle said: “The design of the UK ISA system presents cash as safe ‘savings’ and stocks and shares as riskier ‘investments’, forcing people into an immediate binary decision where the safety of cash usually wins out.”
Uncertainty surrounds the fate of the £20,000 cash ISA allowance | GETTY
Researchers found that several long-standing barriers continue to deter Britons from investing in the stock market. These include fears of financial loss, limited knowledge, restricted disposable income and a preference for guaranteed returns from fixed-rate products or Premium Bonds.
Despite these obstacles, the integrated ISA structure delivered measurable behavioural changes. Participants exposed to the combined account design were more satisfied with positive investment performance and felt less disappointment during periods of negative returns.
The unified approach also produced a modest increase in willingness to hold equities.It reduced the proportion of people entirely opposed to investment exposure and prompted a higher tolerance for investment risk overall.
One of the most notable findings was the apparent resilience of participants using integrated accounts during hypothetical market downturns.
Research suggests these individuals would be less inclined to sell investments reactively during turbulence, potentially holding their portfolios for longer. Reports that the Government is considering reducing cash ISA allowances have prompted concerns from AJ Bell.
The platform argues that limiting cash options or compelling investors to hold specific assets does not address the structural issues that hinder participation in UK markets.
According to AJ Bell, such measures risk discouraging savers from shifting their money into investments, particularly when behavioural research indicates that simplification increases confidence.
The firm warns that tightening allowances could reinforce existing preferences for cash holdings. Its analysis suggests that savers may be less likely to explore investment products if their choices appear restricted rather than simplified.
Michael Summersgill, AJ Bell’s chief executive, said ministers must ensure potential reforms are informed by evidence.
He warned that policymakers could “squander an opportunity to transform Britain’s savings landscape” if decisions are made without fully understanding consumer behaviour.
Mr Summersgill called for a comprehensive Government Green Paper or an independent commission, mirroring previous pension reform processes.
He said policy development should not occur within “a Whitehall bubble, with scant evidence or real-world knowledge to underpin the debate”.
Experts have endorsed the combined proposal
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The chief executive emphasised the importance of making the savings and investment process easier for consumers.
“These behavioural trials show an integrated cash and investing ISA system could remove friction, reduce inertia and help consumers navigate what today looks like a binary choice between cash or investments,” he said.
Dr Mills supported these conclusions and noted that while British savers welcome the prospect of higher returns from equities, providers require Government backing to design products that help customers meet their goals.
