ISA contribution limits. Rachel Reeves has given further clues about possible ISA changes.

Our February Bulletin looked at cash ISAs and the rumours emerging that the Chancellor was planning to cut the cash ISA subscription limit. In March, the Spring Statement said:

“The government is looking at options for reforms to Individual Savings Accounts that get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.”

Since then, there have been various reports of meetings between investment management groups and the Treasury, with the former calling for a cash ISA subscription limit of £4,000. In March, £4.2bn flowed into cash ISAs as the tax year closed.

On 10 May, the Financial Times said that the Treasury was expected to launch an ISA review “within weeks”, although the paper also suggested it could be launched as part of Rachel Reeves’ Mansion House speech, due in July.

On Monday 19 May, Rachel Reeves gave an interview to BBC Newscast in which she was questioned about the future of ISAs (from 33.38 onwards). She was asked whether the ISA subscription limit would be cut and initially replied by saying, “Very few people will be able to save £20,000.” That view is not supported by the most recent (2022/23) ISA stats, which showed 1.772m maximum subscriptions – about 17% of all subscriptions by number and nearly half of all subscriptions by value.

Rachel Reeves went on to say that she was “certainly not going to reduce” the ISA limit, a statement that some media has reported as meaning the £20,000 cash ISA will stay. However, that ignores her next statement that “…but I do want people to get better returns on their savings…and at the moment a lot of money is put into cash or bonds when it could be invested in equities…and earn a better return.”

That equities-are-better line mirrors the Spring Statement, but muddies the waters with the reference to fixed interest, which currently fall within the stocks and shares ISA category. Rachel Reeves made no reference to UK investment requirements, which for the moment seems to be a focus only for pension fund monies.

Comment

The reference to fixed interest suggests the Treasury may be looking at how to avoid circumvention of any cash ISA limit by using quasi-cash type funds, e.g. those holding ultra-short gilts or similar securities.  

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New research, that has thrown an interesting light on spending patterns in retirement. They may not be what you think…

Three years ago, the Institute for Fiscal Studies published a briefing note looking at how the pattern of spending changes through retirement (please see our earlier Bulletin). Its key finding was “On average, retirees’ total household spending per person remains relatively constant in real terms through retirement, increasing slightly at ages up to around age 80 and remaining flat or falling thereafter.” This was at odds with a common view at the time of a retirement income ‘smile’, i.e. that a graph plotting spending over time would have a smile shape, high at the start and end of retirement and reaching a low point around the mid-point when activity has slowed, but care needs have not kicked in.

Retirement spending patterns have now been subjected to another review, produced by the University of Bath, Institute for Policy Research and LCP (Lane Clark & Peacock – primarily Steve Webb). Their report, “Downhill All the Way?” uses information from the Family Expenditure Survey, covering over 100,000 pensioners, surveyed across the 51-year period from 1968 to 2019. Its main findings are:

1. Declining spending patterns in retirement

The analysis reveals that across the entire sample, pensioners’ real weekly spending tends to decline as they age. This trend persists across different income levels and is not solely attributable to reduced income. Even when real retirement income remains stable or increases, expenditure decreases, suggesting that factors beyond financial constraints influence spending behaviour.

2. Health and care needs

Health deterioration and the associated increase in care needs significantly impact spending patterns. As individuals age, a larger portion of their expenditure is allocated to health and care services, often leading to a reduction in discretionary spending. However, the report highlights that the future lifetime cost of care for individuals varies widely. Using data from the Dilnot report (and thus 2009/10 prices) the report says that care costs are highly skewed, with the median lifetime cost somewhere around £20,000, but some people paying £250,000+. According to the 2021 Census, there were 278,946 people aged 65 years and over living in care homes in England and Wales – about 2.5% of the 65+ population. Even at age 90 and above, the proportion in care homes was 21% for women and 10% for men.

3. Cohort differences in income and tenure

Comparing different cohorts of retirees, the study found variations in real income trajectories and housing tenure. Recent retirees tend to have higher real incomes, be less dependent on state pension and have a greater likelihood of owning their homes outright. The latter can help explain the different spending patterns of earlier cohorts who often had lower incomes, were more reliant on state pensions and lived in rented accommodation. Ironically the reliance on rented property is now on the increase among future generations of retirees.

4. Subgroup variations

Unsurprisingly, spending patterns differ among subgroups of pensioners. For instance, those living alone, renters, and individuals without private pension income often exhibit different expenditure trajectories compared to their counterparts. These differences underline the danger in looking at average numbers across the retired population.

5. Policy implications

The report’s authors suggest that retirement planning should account for the declining spending patterns observed among pensioners – primarily those who are homeowners. Such retirees may not require a constant real income throughout retirement, as traditional models often assume. Instead, the report calls for a more flexible approach that aligns with actual spending behaviours, which should lead to more efficient use of retirement resources and avoid too much being held back as a reserve for future expenditure.

Ironically, a week after the terms of reference for the Casey Commission were published (please see our earlier Bulletin), the report notes that the problem caused by the variability in care costs highlights the need for policies that address the issue.

Comment

The report is a useful reminder that there is no one-size fits all for decumulation planning and that individual modelling and advice is vital.

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