Scottish Friendly chief executive, Stephen McGee, has stated that there is a "strong case" for reducing the cash ISA allowance in the upcoming Budget in order to increase household investments.

He said that cutting the annual allowance to £8,000 could help trigger a paradigm shift in investing in the UK by allowing households to build a solid emergency fund while encouraging additional savings to flow into long-term investments.

Around £360bn is held in cash ISAs in the UK, which Mcgee said are often earning rates that struggle to keep up with inflation, meaning that savers are seeing their spending power reduce.

McGee added that the UK’s reliance on cash savings is "one of the biggest drags on household wealth creation".

Currently, the overall ISA allowance sits at £20,000. However, McGee argued that if the cash ISA allowance is reduced, it would give people room to build cash reserves, while steering longer-term savings into investments, helping to rebuild household wealth and support the wider economy.

McGee said: "There is a strong case for reducing the cash ISA allowance if the aim is to genuinely shift saving and investing behaviour. A cap of around £8,000 would still give families ample room to build a meaningful cash buffer, while nudging those saving larger sums to consider investing the rest for the long term."

Furthermore, average monthly household spending currently stands at around £2,700, with a three-month emergency totalling approximately £8,100.

McGee said the new proposed cap would still leave savers making substantial ISA contributions with this emergency fund, with any amount above the limit flowing into investments instead.

He added: "Some argue that pensioners would be disadvantaged by a lower limit, as they often prioritise cash. That concern has merit. Many pensioners, however, have already accumulated significant cash reserves, and for those who haven’t, Government could consider a carve-out for those accessing tax-free pension cash or for those above State Pension age. This would need careful administration.

"But a lower allowance on its own won’t transform the UK’s savings culture. This needs to be part of a broader effort. The UK needs to foster a more confident, long-term investing mindset similar to the US, and that requires Government support through education and awareness. Without that, savers may simply move the excess into taxable cash accounts and continue missing out on the long-term benefits of investing."

---