Chancellor Rachel Reeves slashed the annual limit for cash ISAs. But this isn’t their death knell – they still have a very valuable place as part of a diversified portfolio.
It’s all change for ISA limits
For many savers, the cash ISA has been a huge success story. It’s given them a lower-risk, tax-free way of looking after their money. Close to £700 billion has been paid into adult cash ISA since 2008/09.
But has this come at the expense of investing and growing their wealth? The Chancellor clearly believes so. In her budget speech last week, Reeves highlighted that someone who invested £1,000 in a stocks and shares ISA every year since they were introduced in 1999 would now be £50,000 richer than if they’d opted for cash.
“The UK has some of the lowest levels of retail investment in the G7,” she said. “That’s not only bad for business, it’s bad for savers too.”
So from April 2027, the cash ISA annual subscription limit drops from £20,000 to just £12,000 for the under 65s – the lowest in more than a decade. The remaining £8,000 of the ISA allowance is “exclusively for investment”.
According to Reeves, more than 50 per cent of the ISA market supports the move. Investment platforms had lobbied for an even greater cut, or even removing the cash ISA allowance completely. But while this cutback isn’t as big as first proposed, it’s still a significant drop. Opponents have warned the move could lead to higher mortgage rates, as building societies use cash ISAs to fund mortgages.
A brief history of the ISA
Taking a step back, ISAs were an attempt to create a more streamlined, simplified savings environment.
Replacing PEPs and TESSAs, £28.4bn was paid into 9.3m adult ISAs in that first year. By 2023/24, this had stretched to £103bn and 15m subscribers. In that time, the annual allowance has risen significantly from just £7,000 a year to £20,000, and so too have savers’ options, with a wider range of ISA types emerging. In the past, cash has always outweighed other options, but that proportion has steadily fallen. From around 80 per cent of adult ISAs in 2008/9, cash ISAs were down to around 66 per cent by 2023/24.
So why the change?
Reeves and her Treasury predecessors want to encourage more Brits to invest (although former Chancellor Jeremy Hunt’s plan for a ‘Brit ISA’ is now abandoned). Previous research by the Investment Association found 39 per cent of UK adults were actively investing3 (other reports put this figure much lower). By comparison, in the US, around two-thirds of citizens are investors.4 By pushing more people towards stocks and shares ISAs, Reeves hopes they will grow their wealth and, by extension, the UK economy.
This isn’t the end for the cash ISA
ISAs are still the most tax-efficient solution for your money, with no capital gains or income tax to pay on your savings. This means a cash ISA still has a valuable place in a diversified portfolio. So what do savers need to consider now?
Use your limits
Although the cash limit is coming down, the overall annual ISA allowance is still £20,000. It’s also worth highlighting that many savers are putting in well below the annual subscription limit anyway. In 2023/24, the average subscription per account was just under £7,000 (although you can pay into more than one cash ISA per year).5 This suggests plenty of room for manoeuvre before savers reach their limit.
Pay attention to deadlines
The changes announced in last Wednesday’s budget won’t apply until 2027, so savers wanting to take advantage of this year’s annual allowance still have time before the deadline.
Whatever the destination for savers’ money, what’s beyond doubt is that transparency on any ISA products and sound advice are essential.
Important information: The views expressed are those of the contributors at the time of publication and do not necessarily represent the views of the firm and should not be taken as advice or recommendations.
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