Big City firms are urging Rachel Reeves, the chancellor, to scale back tax breaks for cash Isas, a form of saving beloved by millions of Britons, in an effort to boost UK financial services and — they say — the economy, by channelling those savings into stocks.

The government would love to see more of our savings to go into the Stock Exchange to support growth and the data is clear, over the long term the markets outperform cash.

But would punishing cash savers nudge more money into equities?

There are, after all, plenty of other places for savers to put cash if they are prepared to lock it away for a year or more. And savers clearly love cash Isas. Of the four classes of Isa, cash is by far the most popular with nearly £300bn of savings.

But although far more cash Isas are opened each year than stocks-and-shares Isas, and more money is put into them, the value of stocks-and-shares Isa accounted for 59.3 per cent of the value in 2022-3, according to government data — even after a 5.6 per cent decrease in the market value of those holdings.

So why are a significant proportion of savers less enthusiastic about a product that should make them richer? And what might change that?

Ian Cook, chartered financial planner at Quilter Cheviot, says people need better financial education not just about the long-term benefits of investing in stock markets but more broadly about retirement planning and pension tax rules.

Trying to incentivise people to invest in British stocks is not unprecedented, he adds.

“When Nigel Lawson introduced personal equity plans — PEPs — in the 1986 Budget, a proportion of the investments had to be in British stocks. Additionally, before the 2017-18 tax year, the allowance for an investment Isa was generally higher than for a cash Isa.”

But Cook says it is a significant behavioural leap to assume that cash Isa savers will be immediately comfortable investing.

I’ve been encouraging a friend to think about moving part of an inheritance into something more inflation-beating than cash. But although he sees his savings as a long-term investment, he likes the low risk of cash.

It also has another attraction: he doesn’t need to sit down and think about what sort of funds he might want to invest in: active, passive, emerging markets, global, UK only . . . the list goes on. And it requires time to understand the risks and benefits.

I have a simple suggestion that could nudge millions of pounds of savings into equities every year, without denying the cautious savers the right to put £20,000 a year into their rainy day funds.

Make stocks-and-shares Isas fully inheritable.

Technically, my plan wouldn’t actually put more money into the stock market so much as stop it being taken out, but the effect would be more invested in UK plc.

At the moment you can pass on your Isa, with its tax wrapper to your spouse or partner, but not children or other heirs. And I have a hunch that if my friend had inherited a portfolio of blue-chip shares that delivered an average return of 6.3 per cent on an annualised basis over the last 20 years, in a tax-free wrapper, he might have held on to it.

I was lucky enough to inherit a long-held Isa invested in the FTSE from my late mother. But the only option was to disinvest and receive a cash payout. A couple of decades of steady growth mean it would take me several years of maximising my Isa allowance to reinvest in the market. Will I? I don’t know. Would I have held on to the Isa if I could have inherited it? Definitely.

Sadly, I don’t think the chancellor will back my suggestion. She appears to be heading in the other direction: she cut in half the IHT relief on holding certain Aim shares for more than two years at the last Budget. 

But, with changes to the rules on pension inheritance coming in 2027, people are already rethinking how and when they pass down wealth to the next generation. 

Wealth managers report many families are gifting money to children and grandchildren to be invested in stocks-and-shares, Lifetime and Junior Isas.

There are lots of Isa investors aged over 65 with sizeable pots and many of them — people like my mother who first bought shares during the “Tell Sid” privatisation years — do not have wealth managers to advise them. Allowing them to pass on Isas to their heirs tax free has the advantage of simplicity.

There would be a cost to the Treasury in lost inheritance tax if Isas could be passed on with the tax wrapper, HMRC estimated non-structural tax reliefs in 2023-24 cost £207bn with Isas accounting for £7.7bn. Even under the current rules, that cost is projected to increase as greater wealth is built within Isas.

Adding to the list of IHT exemptions would also be regressive, but tax reliefs exist to achieve economic or social objectives and if the government’s objective is more investment in UK plc, I suspect that a carrot would be more effective than cutting the cash Isa allowance.

One tax expert I spoke to is certainly anti-stick. “My recommendation to the government would be to make Isas inheritable,” says Nimesh Shah, chief executive of Blick Rothenberg. “And also increase the stocks-and-shares Isa limit to £30,000 per person.”

Or as Cook put it: “The more people we get investing both in the UK and more generally, the more the economy will naturally benefit.”

David Firn is a senior news editor with the Financial Times who has more than two decades’ experience covering business and finance.