Rachel Reeves savaged over 'fantasy politics' after Cash ISA plan rubbished

Rachel Reeves has been warned that slashing the cash ISA annual allowance to £4,000 will scupper the Labour Government's plans for 1.5 million new homes.

The Chancellor is reportedly considering changes to the current regime, which allows people to save £20,000 tax-free per year in a cash ISA and stocks and shares ISA.

Mrs Reeves refused to rule out such a change last week, saying it was important to help savers, but she wanted to create a culture of retail investing similar to the US.

Reports of the potential change have sparked anger among property and mortgage experts who warn it would dampen the housing market and threaten the Government's new homes target.

Scott Gallacher, Director at Rowley Turton, said the potential change won’t magically turn Britain into a nation of investors. Still, it does risk pushing some into investments they neither understand nor want.

He added: "As for 1.5 million new homes - that’s fantasy politics. I’ve spoken to town planners, quantity surveyors, property developers, and builders - not one believes it’s achievable."

Peter Mugleston, Managing Director at Online Mortgage Advisor, said the effect on buyers would mean less activity for mortgage lenders, potentially tightening credit conditions.

He added: "Developers, too, may become more cautious, threatening the ambition to build 1.5 million new homes. If buyers struggle to save, who will be purchasing these properties? Encouraging retail investment shouldn’t come at the expense of homeownership."

Mrs Reeves argues that boosting retail investing will "support" the Government's pledge to grow the economy and create "good" jobs across the country.

But Robin Fieth, Chief Executive of the Building Societies Association (BSA) said it is a myth savings held in cash ISAs are sitting dormant and not supporting the UK economy.

He added: "They are an important source of funding for building societies, credit unions, banks and other providers which use these deposits to fund their lending to individuals, families and businesses. That includes mortgage lending.

"With the Government committed to increasing homeownership and building 1.5 million new homes, it’s baffling to understand why the Chancellor would want to risk making mortgage availability more difficult and more expensive for first-time buyers and home movers."

Cash ISA balances account for 39% of all savings balances held by building societies, according to the BSA. Lenders have already written to Mrs Reeves to urge caution on changes to the current ISAs model.

Babek Ismayil, founder of agents OneDome, said slashing the ISA cash allowance could slow down prospective homeowners' ability to save, delaying their entry onto the property ladder.

He added: "This could, in turn, dampen demand in the housing market at a time when stability is crucial."

Ken James, Director at Contractor Mortgage Services, said: "Rachel Reeves needs to step outside of her front door and talk to the people she hopes will buy these homes.

"She will very quickly realise that the reality of saving will be greatly hampered by this move."

Dariusz Karpowicz, Director at Albion Financial Advice, said the Chancellor's potential cash ISA allowance cut might fill Treasury coffers, but it is unlikely to lay many bricks in Labour's ambitious housing plans.

He added: "While the UK's generous £20,000 ISA limit is indeed an international outlier, shrinking it won't magically conjure up 1.5 million new homes.

"The real concern lies in declining building approvals – a fundamental disconnect between fiscal tinkering and the concrete reality of Britain's housing crisis.

"For the Government's pledge to stand on solid ground, they'll need more than just ISA adjustments in their architectural blueprint."

A Treasury spokesperson said all aspects of savings policy are kept under review and it is "really important" the Government helps support people to save in order to achieve their aspirations.