In this video, I explain why this policy is recklessly irresponsible. The government claims that redirecting savings into stocks and shares ISAs will benefit the UK economy, but around 99% of all activity on the London Stock Exchange takes place in the secondary market, where second-hand shares are traded.
No new money reaches UK companies as a result. No jobs are created. The economic rationale for this change simply doesn't hold up.
That means this is the moment to reconsider how you save, and not be pressured by the government into shares if that is not what you think is right for you.
This is the audio version:
This is the transcript:
As you should know by now, I think that we are facing a major economic crisis, and at the very same moment as I think that is happening, the government is about to force you to change how you save if you use ISA accounts, as a great many people in the UK do.
From April 2027, those who are under 65 will be barred from putting their full £20,000 a year ISA allowance into a cash-based ISA. The limit is going to drop to £12,000 a year for cash-based ISAs, and the remaining £8,000 must go into the stock market.
Now, you might say, so what? I haven't got £20,000 to save a year. I haven't got anything like £12,000 to save a year, and I suspect that puts you well into the majority of people in this country. But the point is, the Chancellor is calling for this to encourage investment in what they are calling stocks and shares, and the City calls it what is good for growth, and I want to argue that both of them are wrong and that the timing of their change in policy could not be worse.
Now, let me reiterate. Most people do not save £20,000 a year in their ISA account, their Individual Savings Account, as it is called. The cap is largely a distraction. Most people aren't affected by it. The average cash ISA saver puts in a few thousand pounds a year at most, and not £20,000, and for most people, therefore, the new £12,000 ISA cash limit changes nothing about how they save.
But that does not mean there will not be pressure brought upon you to change the way in which you will save in the future. This policy is being put in place for a reason. The government is trying to persuade you that now is the time that you should put your money into shares. The message being sent is clear. Cash savings are no longer welcome. You should be in the stock market. That is what they're saying, and I am disagreeing.
Why am I disagreeing? Because the Bank of England have, as I have noted, recently issued warnings about the uncertainty facing the whole of the financial market. They say we are facing major risks from overvalued shares, from an AI bubble, from the war in Iran, and from the risks that the shadow banking system is creating within the economy. And at the same time, the stock market is being promoted by the government as if it is the ultimate destination for your savings, when it might not be.
And let's be clear why that's the case. I'm going to be brief here because we've already made a video on this issue, and I don't want to reiterate everything again. If you want to find out what we're talking about, follow the link that we are going to be providing above the screen now and down below.
The stock market consists of two types of activity. The first one is called the primary market, which is where companies raise new money to use for investment purposes within their organisations, and the secondary market, as it is called, is where existing shares issued by companies are traded between savers, and the company receives nothing from the value of the transactions undertaken. Not a penny at all.
The distinction is almost never made by those promoting stock market investment, and the government's entire argument rests on the primary stock market being the one that matters when, as a matter of fact, almost all activity in the London stock market takes place in the secondary market.
The numbers tell the story. The total value of the London Stock Exchange is around £3.5 trillion. The total value of shares traded annually is around £5 trillion. In other words, more shares are traded annually than exist, and on average, at the moment, and we are talking about an average because these things do change over time.
Between £10 billion and £30 billion a year is raised on the stock market to be put into the companies through the primary stock market. What that means is that a tiny proportion of all share trading is in new shares. About 99% of all stock market activity is in what I call secondhand shares; ones where no money reaches any company for investment purposes at all. There is no net gain to our economy as a consequence, and yet the government is promoting this activity.
The investment link between buying shares and the creation of new value within our economy is broken. The City knows this, and the government knows it, but both are pretending otherwise. When you buy shares in the secondary market, your money goes to whoever is selling and not to the company whose name is on the share that you buy. The seller may be a pension fund, a hedge fund, or another individual saver. It doesn't matter. City operators take a cut as a result, and they have every incentive as a consequence to encourage frequent trading, which, as you can see, happens with more than the total value of the market being traded each year. And the government's claim that share ownership funds UK businesses is, as a consequence, not supported by how the market actually works. That is a fact, and the government is ignoring this, and it is recklessly irresponsible to do so.
This is not good policymaking, and we only have to look at recent comments from Sarah Breeden, Deputy Governor of the Bank of England, and responsible for its policy on financial stability to find out what she thinks on this issue. She has said that there is a significant risk of a stock market adjustment at present. Adjustment does mean a crash, by the way. That is just the polite language that is used by regulators, and that is what she is. Overvalued assets, geopolitical uncertainty, and fragile market sentiment are all pointing in the same direction. At that moment, the government is then pushing ordinary savers into the very shares which might be the things most subject to price correction, about which the Bank of England is warning.
Now, there are people who can afford the risk that the government is talking about. They're wealthy, they've got large share portfolios. They might be spread around the world. They can take the risk of what is going to happen.
Small savers, those who save through ISAs, I doubt it.
I think the government is being recklessly irresponsible at this moment. 11 million adults hold ISAs. The majority of that money is in cash ISAs, but a fair number have share ISAs as well. The government is trying to force them to increase their share savings, and as a result, they're doing something which is unforgivable at this moment. They are trying to force risk onto small savers at a time when that risk is increasing, and in my opinion, that makes no sense at all.
They recognise this makes no sense by recognising that those over 65 do not have to change their savings in this way. For everybody else, the risk is high.
So what should people do, bearing in mind that most people save moderate amounts? If you currently save into a cash ISA, use your full allowance this year if you are able to, and don't worry if you can't; put in what you can. Do not be panicked by the government into putting money into shares is my point. ISAs aren't the only way to save. You don't have to save in a tax-free way and can still get a return. Better to keep your money and pay a little bit of tax as a consequence rather than put it all into the stock market and lose it. That is my suggestion to you.
Understand what's going on here.
Understand that the government is being recklessly irresponsible.
Listen to the Deputy Governor of the Bank of England instead.
Understand the risks.
A deep myth is being sold to you that shares do support the value of the UK economy. They don't. That is not true. Economic teaching might suggest that this is true. The government might like to suggest that this is true. The City of London might like to imply it is of value because this is true. But the fact is that the level of subsidies offered to the City of London for pension and ISA savings are in fact bigger than the amount of money that is delivered to UK business as a consequence for new investment in new machinery and job creation in this country, which is a scandal in itself, and you should ignore all this noise.
What you should be taking into account is safety at this moment. You should be worrying about what is best for you, and at this moment, if you are in any way cautious about what is happening in the world — and what is happening in the world is deeply uncertain and out of control as far as you are concerned — then you will head for safety. That is the policy that rational people adopt when the world is in crisis. Heading for safety means moving out of the stock market, even though the government is saying we should be moving into it, which is why I say they are recklessly irresponsible.
Do what feels right to you in this situation. Take the lowest level of risk that you feel comfortable with at this moment in time and ignore the advice from the government. Do what you think is right. You won't regret it. That's my suggestion. Caution is the keyword, and remember why you made the decision. This is a maxim that I've always followed in my life.
And let me offer one personal bit of advice. If you decide to go for caution now, which is what most rational people do in the situation in which we find ourselves at this moment, then make a note as to why you have made your decision to do so, or if you have decided to keep in risky investments at this moment, why you've done that as well. Both might be right for you, but do make a note of your reasons for making the decision at this moment. Then you can look back later on and not regret what happened because you can see that at the moment you made the decision, you were being rational.
You don't have the benefit of hindsight at this moment. You will in the future, but if you understand what the motive for your decision was, you will regret it less. You might regret any decision you make at this moment, including going for caution, because it might turn out that Sarah Breeden at the Bank of England and I are wrong. There might be no financial crash coming our way, for example, and you should be back in the risky market after all. But if you have noted why you decided to leave the market, or why you decided to put everything on black and go in with everything you've got, whatever you've decided to do, you will understand the consequences that eventually transpired. That matters, and that to me is key.
Understand your decision-making. Make a note of it and go with it, following your instincts and not those of anybody else. This is the moment to understand everything, but I am telling you, the government is wrong right now. It is being irresponsible. I do listen to the Bank of England. I do think they're doing proper risk appraisal at this point in time. Going for shares at the moment looks to me to be a bit of a reckless act unless you have a great deal of money and you can afford to weather the storm, and that puts you in a very different market position from most people who are watching this video. So follow your instincts.
That's what I've got to say. What do you think? There's a poll down below. Let us have your comments. Please share this video. Please subscribe to the channel, and if you like what we're saying here, if you would like to support us, we would really appreciate it.
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At a practical level, I believe – but DO, please. check – that gilts are an acceptable investment in a stocks and shares ISA. If so, then small investors might find this a decent alternative. Buying individual bonds in small size probably doesn’t make sense but a short-maturity gilt “index-tracker” fund would work.
I would also support the right of Government to impose restrictions on where tax-advantaged savings might be deployed. However, this is an absurd constraint that will inevitably lead to many small savers taking on risk that is inappropriate…. and it is the thin edge of the wedge – what next? Private Equity?
Well…………..all I can say is that more than anything else, this move shows for sure that the State is now in cahoots with Capital. Irresponsible? How about just ‘corrupt’?
You could imagine the pitch to Reeves can’t you ‘investment’ ‘can’t lose’ ‘national interest’ ‘stake in the country’ ‘diversifying risk’ (actually increasing risk for more people) and all that crap.
This to me at least is one of those moments when how our society is ran makes itself known. And it is ugly through and through. All this is about is disaster capitalism sucking up money and transferring it from the many to the few. Disgraceful. We deserve better than this…………………..
I’d like to see all ISAs abolished and replaced by a single “unearned income tax allowance”.
That allowance, of say £5k, would apply to all unearned income including, but not limited to, savings interest, capital gains, and dividends. For most people, who don’t have more than £100k in savings, have minimal capital gains, and no dividend income, this would mean they pay no more, and probably less, tax. For that small, lucky, part of the population who have more savings I ask why is the government subsidising their savings?
Some might object that this would disadvantage average pensioners. I think that is most unlikely. The median private pension pot, at retirement, is £156k for men and £56k for women. For most people most of their pension pot would not be taxed. And there are other ways to save for pensions (e.g. a pension plan – the clue is in the name, or annuities), you don’t have to save for your pension in ISAs.
The advantage of a single unearned tax allowance is simplicity. Most people wouldn’t have to do anything to avoid tax on their savings. People wouldn’t have to go to ISA providers, with the attendant inconvenience and restrictions, to save. And such a system would be highly progressive. The wealthy wouldn’t get multiple tax allowances (for different types of savings) and wouldn’t be subsidised for holding large ISA savings.
Why do we have ISAs? What’s the point?
Why?
Why should unearned income be treated better than earned income?
This is straightforward bias to wealth, Tim.
But I agree, there is no reason for ISAs as we have them now. There would be if they were used to direct hypothecated capital, as I propose.
My earned income personal allowance has been frozen for some time, in other words, it has gone down in real terms.
Yet I get two unearned income allowances, and people with higher incomes than me pay a lower rate of tax on various other types of unearned income.
Feels like an incentive to not work, to me. Unless of course, you are sick, disabled, mentally unwell, or otherwise not in work, in which case the government seems determined to bully and starve you onto the employment market – without providing you with paid work – by reducing your access to social security – totally crazy, and very cruel.
I knew that women earn on average less, so have smaller pensions. But the difference you quote shocked me. We get credits towards state pension if unwanted due to caring for children, but managing on the state pension is scraping by unless you own your home outright and can let out a room to help with the bills.
Watching Richard’s videos on YouTube there are many adverts for pension consolidation and for investment, they have increased recently. I had a small pension pot earning, after fees, under 1.7% for last financial year. That was NEST, the government’s own chosen provider. It wasn’t keeping up with inflation. Because it was a pension, I paid 1/5 tax, probably would have been better off just paying into a savings account as I likely lost the 3% my employer put in. What’s the point?
A good question.
NEST worries me
You can put your ISA money into short dated gilts or money market funds in a conventional ISA. There is loads of choice. It’s not a difficult one to work out. You are not forced to buy equities at all.
“They’re just second hand shares….”
https://m.youtube.com/watch?v=lCtrcAp3TEY
(Sung by Barbara Streisand, Funny Girl)
Having my tax free cash savings limited to £12K a year is what my middle son (17) would call a First World problem
The Governments behaviour is highly irresponsible, if anything its stocks and shares ISA’s that should be ended.
How about some sort of National Savings product to replace ISA’s, something thats affordable for low income households like expanding the Help to Save or ‘Save as you Earn’ but not for buying shares.
Works for me. That is a variation on what I am suggesting.
Why are they trying to promote the stock market? It could be that for many people, the last fifty years has shown that the only “safe” investment for the average person has been property.
But turning homes into investments, the dream of the neoliberals, has resulted in a market were affordability no longer exists, and we have insecurity and housing crisis after housing crisis. Labour probably don’t want to be seen as supporting it as an investment. Of course, they don’t do anything to stop it, or offer any answer to the real crisis of affordability. But the home as an investment has become dangerous territory, as it is financially destroying the hopes and lives of many people. More so, the higher prices go.
But, the saying, “safe as houses” is true in the minds of many. If you were to ask the average person, what would you rather invest in, property or shares, the vast majority would say property. Hardly anyone would say shares, because they are more of a risk. Whenever there is trouble in the world, stock markets are the first to fall — big time, every time. That’s the big headline as stock markets throw their toys out of the pram. House prices don’t fall. They might in the event of a recession/depression, but at that point, the government will step in to rescue and prop up the system. Set it back on course to have another go, as they did after the banking crisis.
I hate the fact that homes are seen as investments, but that’s the way it has become. Unfortunately, I don’t see it changing any time soon.
Mar P is not far wrong.
Housing is however complex – it is both a ‘good’ (to be consumed, owned, lived in) and an ‘asset’ (invested in, owned, traded). The use value – as a gateway to secured debt and in financial viability for debt and pension replacement strategies – certainly rules at the moment and that is a lot of the problem with its pricing too which I think gets factored in. But an address also opens up access to other services like health and schools.
And housing is something else too: they are liabilities – they need to be looked after to maintain their liveability and asset value. They need long term financial support once created – we need new homes and to look after the existing ones too – both ends of the candle.
We simply do not have the polices to deal with this complexity at the moment. Private developers I do section.106s with whose shareholders have been used to 30% profit margins are now moaning about 20% profit margins. It shows you just how fucked up it all is to be honest.
Trading in shares, on average, to a first-order effect, does nothing for the real resources of the UK or other country.
Extending this, does a fall in the value of shares affect the country’s real resources? Hard to see a direct effect.
If the value of shares is part of an economic fantasy, how far does this fantasy reach? One’s house, for example; in general, if the value of your house falls so does the value of another house you might move to, and gains/losses on house prices are part of the fantasy world of money, at least until you die.
And as for subsidising ISAs — why did it ever happen? Paying one’s taxes is a good thing, and the benefits are a positive bargain.
The change is to mood – and animal spirits matter, even when based on worthless data as FTSE indices are
Richard I agree with everything you are saying and have converted my SIPP to cash. However with my pension I have no option to invest at a decent interest rate (I get a low rate). What safe options are there for those of us not wanting our pensions to become worthless at this time? Or are there pensions that I can invest with a decent rate of interest?
I think Rachel Reeves is so wedded 4the city she neither understands or cares about us ordinary folk. It’s all about keeping bankers happy.
Hazel
I am sorry, but I cannot advise on that
Richard
Apologies. It’s a frustration of mine that it feels pensions don’t have a non stock market option.
It is not just the state that a is encouraging this, but the private sector too. I’m constantly seeing adverts about different investment platforms that will make your money work for you, allegedly. If I was to be slightly conspiratorial I could claim it was deliberate. Those with lower incomes and very limited means to save have been increasingly impoverished by the lack of opportunities and cuts to services orchestrated by the neoliberals over the last 40 or so years. Are the neoliberal now turning their attention to those who have saved a little and are now planning to impoverish them?
I realised a few years ago that asset values have been highly over inflated over the last 40 plus years and have taken steps to ensure as much as possible my exposure to risk is extremely limited. I don’t need to be in on the upside, but could be suffer significant losses on the downside. Even though many stock markets have hit record highs in recent years and I have missed out, I’m happy to take the position I have as I suspect the downside is going to be a big one.