The Cash ISA is popular again.
When interest rates were low it was shunned. As interest rates headed back up, so did uptake of Cash ISAs, often in preference to conventional savings accounts. Cash ISAs currently have an estimated £300bn deposited.
It’s easy to understand why. A Cash ISA offers all the security and predictability of a traditional savings account. Unlike a traditional savings account, it offers tax efficiency. The taxman will not be helping himself to a share of your cash ISA, either while you use it to build your savings, or when the time comes to start spending them.
It’s hardly surprising that the Cash ISA has become the go-to for spare cash.
But clouds are gathering.
The budget and the Cash ISA
The government is not keen on the Cash ISA. It deprives the treasury of revenue, and it does nothing to stimulate the economy, as Stocks and Shares ISA may. Reports previously suggested the Labour government was considering scrapping the Cash ISA, but a strident backlash from building societies and savers prevented it.
But rumours suggest that Chancellor Rachel Reeves is still looking to cut the Cash ISA limit from its current level of £20,000 to £10,000 in the upcoming budget in a bid to get more people investing.
Individuals can currently save up to £20,000 in an ISA – either invested in stocks and shares or in cash savings – and enjoy the interest or gains they make free of tax. Ms Reeves has committed to keeping this overall level of £20,000 tax-free across both ISAs but is reported to be (amongst other things) considering reducing the Cash ISA limit to £10,000, while keeping the stocks and shares ISA at £20,000.
The thinking is that this will encourage investment in the stock market.
What does this mean for you?
The government has its own problems including an economy which needs a shot in the arm. Diverting funds from the nation’s Cash ISA into Stocks and Shares ISAs could help.
But unless you are gripped by patriotic fervour, your focus will probably be on your own needs.
You could conceivably be better off with a Stocks and Shares ISA. City Minister Lucy Rigby, suggests the switch could double ISA returns.
“Someone who put away £1,000 in a cash ISA every April since 1999 would now hold about £34,000. If they had instead invested in a stocks-and-shares ISA, they could now have around £83,000.”
Lucy Rigby
But the potential for greater returns is not the only reason for choosing one type of ISA over another.
Cash ISAs typically offer lower returns, but they provide some predictability—unlike Stocks and Shares ISAs, which are subject to market fluctuations . Cash ISAs offer security, with deposits protected up to £85,000 by the Financial Services Compensation Scheme (FSCS). In contrast, Stocks and Shares ISAs do not provide this level of protection.
The Cash ISA has helped millions build a financial buffer against emergencies with no risk. It provides valuable tax protection on your savings and helps build long-term financial resilience. Cutting the amount that can be stashed away in one each year will mean a fresh look at financial plans is essential.
What can you do?
The immediate thought might be to maximise your Cash ISA holding while the £20,000 limit is available.
But speculation ahead of the budget should not prompt you to make hasty moves. You’re likely to still have £20,000 allowance until the end of the current tax year. You may want to consider making full use of your existing ISA allowances while you can.
But what should you do in the future?
If Cash ISAs are limited, you could do what the government wants, and become a Stocks and Shares investor – or you could consider looking at more elaborate solutions, like short-dated gilts or money market funds in a Stocks and Shares ISA.
You might also keep your savings in conventional fixed or easy access accounts. The personal savings allowance lets basic rate taxpayers earn £1,000 of interest in the year before paying tax, while higher rate taxpayers have a lower allowance of £500. Additional rate taxpayers don’t receive any personal savings allowance.
The most suitable way forward may depend on your individual circumstances, and exploring your options could benefit from expert guidance.
Call us at Continuum. We can help you find suitable Cash ISAs with the most competitive rate of return, the alternatives for savings – and if it’s time to get started with investments, the most appropriate Stocks and Shares ISAs for you.
The budget is coming soon. Why not call us to look at your post-budget savings strategy today?
Cash ISA limit could be reduced to £10k – this is what you should do
Chancellor to look again at shaking up ISAs – report | Financial News
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
Investors in ISAs do not pay any personal tax on income or gains. Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice, deposit accounts or UK Government Securities.
Equity investments do not afford the same capital security as deposit accounts.
