The limit could be cut from £20,000
Cash ISA savers are being encouraged to explore other options for their money, as experts warn of a potential reduction in limits to just £12,000, which could be announced this Wednesday (November 26).
Financial and investment firm AJ Bell has reported rumours that Cash ISAs could see their current £20,000 limits slashed to just £12,000. Cash ISAs, which allow savers to stash away money tax-free each financial year, have been under scrutiny throughout the year, with whispers at one stage that the limit might be set as low as £10,000.
Whilst Chancellor Rachel Reeves previously avoided making changes to Cash ISAs earlier this year, Laura Suter, director of personal finance at AJ Bell, has indicated that there are reports of a £12,000 limit potentially being introduced in the Budget this Wednesday.
She stated: “The government is rumoured to be looking at restricting the amount of cash that people can hold in an ISA in next week’s Budget. Nothing is confirmed, but some reports claim the cash portion of the annual ISA allowance will be restricted to £12,000 from the current £20,000. Investors would be able to put the balance (or more) in a Stocks and shares ISA, but not in cash.”
Savers who typically exceed this amount will need to seek out alternatives before the change is implemented. Luckily, stocks and shares ISAs generally ‘significantly’ outperform their cash counterparts, reports the Express.
She added: “Many who would otherwise have stuck that money into a Cash ISA may be looking for alternatives providing lower risk, cash-like returns. Recent figures from AJ Bell highlighted that investment returns have significantly outpaced cash since ISAs were launched in 1999, with investors more than tripling their money, while cash savers barely beat inflation.”
She continued: “However, investing doesn’t have to be full risk, there are lots of lower risk, cash-like alternatives people can invest in through their stocks and shares ISA.”
Ms Suter suggested that savers seeking alternatives might explore money market funds, bond funds and UK treasury bills, alongside short-dated bonds or multi-asset funds. She explained: “Money market funds have boomed in popularity in recent years and invest in short-term debt like bank deposits, government loans and corporate loans. The managers of these funds will select a mixture of different investments to manage the money on your behalf, aiming to preserve your money while giving a cash-like return.”
Bonds essentially function as loans, except you’re lending your money to governments and companies, rather than borrowing from them. In exchange, you receive regular interest payments and your initial investment back at a predetermined future date.
Interest rates have increased in recent years, making bonds a more appealing option. Regarding short-dated bonds, she explained: “Investors don’t have to buy a fund, they can invest in bonds themselves. For example, in recent years we’ve seen an uptick in the number of investors buying gilts (UK government bonds). Short-dated bonds are bonds that will mature (so repay the investor) in a short time, usually under two to three years. Because they are short-term, they are less sensitive to interest rate changes.”
She continued: “Treasury Bills (or T-bills) are short-term loans to the UK government. When you buy one, you’re effectively lending money to the government for a few months – typically one, three or six months. Rather than paying interest, they’re sold at a discount and repaid at face value. So, if you buy a £1,000 T-bill for £980, you’ll receive £1,000 when it matures, with the £20 difference being your return.”
Multi-asset funds, meanwhile, offer an immediately diversified investment portfolio. Many private pensions already operate on this principle – combining various investment options with differing risk profiles and growth objectives across specified timeframes.
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