Worried about the possible cut to the cash ISA allowance? Here are your options

It may seem crazy to consider cutting the annual cash ISA allowance when they’re so popular and they facilitate just the kind of good financial habits we’re all encouraged to adopt. So, why the proposed move?

The reasoning is that nowhere near as many people use investment ISAs – just 21% of the adult population compared to 40% who prefer a cash ISA. And that’s understandable: cash comes with guarantees that you just can’t get with investments through stocks and shares. But, right now, the London Stock Exchange (LSE) could do with the boost. And the Chancellor, Rachel Reeves is being lobbied to encourage more people to make the switch.

So, if you’ve traditionally been nervous about using the markets to gain an income, it might be time to revisit your reasons, particularly if it comes from a place of fear. At Investing Insiders, we know that many people avoid investing because they simply don’t feel they have the knowledge and education to approach it. The longstanding lack of investment education in the UK means that while 2 in 3 Americans invest in the markets, just 1 in 3 UK adults do so in the UK.

Of course, stocks and shares won’t be right for everyone. Investing is better suited to those who can put their funds away for at least five years, so if you might need that money sooner, keeping it in cash could be a better fit. The golden rule is:
save for what’s around the corner and invest for the future.

But, if you can afford to look more long-term, the consensus is that investing offers greater potential gains. Of course, it does come with higher risks, including the risk you could lose your initial deposit. And, past performances do not guarantee future gains. But, historically, those who have put their faith in the markets have enjoyed far greater returns than those who used savings accounts instead.

For further information and tips on how ISAs work, read our Guide to Stocks and Shares ISA.

For our recommendations on the best stocks and shares ISAs, see our list of the Best Stocks and Shares ISAs.

This smart option has the benefit of protecting your assets from tax as they are held within a stocks and shares ISA, but allows you to keep the benefits and security of cash.

It’s possible to achieve this balance because many investment platforms pay interest on cash held, but not invested, within portfolios. And there are some really good rates around. Currently, Trading 212, for example, is paying 4.9% interest on any uninvested cash kept within your investment portfolio.

With this approach, there’s none of the risk that comes with being invested in stocks, or other investable assets, but you’re still getting a good, guaranteed, rate of return. And, unlike many high-paying ordinary savings accounts, the amount you can save this way is unlimited in most cases.

Not all investing comes with high levels of risk. Money market funds (MMFs) are designed to be low-risk and maintain a stable value while generating returns that have the potential to outstrip cash.

MMFs are gaining in popularity – in fact, interactive investor has reported that assets in Money Market Funds have risen 1,100% in the past two years. And because you can invest in these funds through a stocks and shares ISA, you are within a tax wrapper and therefore not liable for any tax on your income.

Moneyfarm is one of a growing number of providers that offer MMFs. They call this option ‘Liquidity+’ and it’s a fund that is made up of low-risk assets held in money market funds such as bonds, certificates of deposit and commercial paper. This type of portfolio is intended to be held for less time than stocks and shares portfolios – 2 years or less – and you can exit or transfer your funds to another type of investment at any time. The Moneyfarm Liquidity+ fund offers consistent returns in line with the 4.8% advertised.

There is a fee to pay for being invested with this platform (and other investment platforms offering these funds), however, which will reduce your returns. So, shop around for providers that offer the lowest fees for the value of your investment. Vanguard, Hargreaves Lansdown, and interactive investor also offer Money Market Funds.

If you want to invest in MMFs within an ISA, use our calculator to find out which platform offers the most advantageous fees for your pot.

The big advantage of saving through an ISA is that not a penny of the income you earn in interest can be taxed. With Rachel Reeves mooting a cut to the annual allowance that would see the UK savers only able to annually put away one-fifth of the amount that is currently allowed, that could mean more tax to pay on your savings.

However, ISAs aren’t the only way to catch some tax-free benefits. If you are a basic rate tax-payer, you could also benefit from putting your money into a high-interest ordinary savings account.

The reason your tax band matters here, is that while all tax-payers have a personal savings allowance (PSA), the amount you can put into your PSA varies depending on your income tax band.

If you are a basic rate tax-payer, you can earn £1,000 of interest per year, tax-free. That drops to just £500 of interest if you’re a higher-rate tax payer – and zero if you’re a top-rate tax payer.

If you could access one of the top-paying savings accounts, which are currently paying up to 7% interest, then you’d need to put away more than £14,285 in a year to earn £1,000 in interest and breach that PSA threshold. In reality, the savings accounts paying the very highest rates of interest tend to limit your deposits to far less than £14,285 per year, but if you’re a basic rate tax payer, it’s still worth looking at what you could be getting in a regular savings account if you’ve maxed out your ISA allowance.

Of course, all of this is currently just speculation. We’ll need to wait for the Chancellor’s Spring Forecast on 26th March for her decision on this.

And, if you currently save £4,000 or less per year into your ISA, then this proposed change won’t affect you at all.

For all press enquiries, please contact: antonia@investinginsiders.co.uk