Chancellor Rachel Reeves' overhaul of the ISA system, including a reduced Cash ISA allowance of £12,000 for under-65s, is backfiring as savers rush to deposit cash, according to a financial expert. Sarah Coles, head of personal finance at AJ Bell, described the trend as an 'unintended consequence' of the policy.
Details of the Reforms
In last year's budget, Reeves announced that from the 2027/28 tax year, individuals under 65 will only be able to deposit £12,000 annually into Cash ISAs, down from the current £20,000. Additionally, interest on uninvested funds in Stocks and Shares ISAs will be taxed at 22%. The goal is to encourage more people to invest in assets like stocks and shares, which historically outperform cash and better protect against inflation.
Savers Rush to Cash ISAs
Contrary to the government's intentions, savers are flocking to Cash ISAs. A record £12 billion was deposited into Cash ISAs in April 2026, one of the highest monthly totals ever. Coles noted that this tax year is the last chance for under-65s to deposit up to £20,000 before the cut, prompting a 'dash for Cash ISAs'. She said: 'For a policy that was intended to encourage people to move away from cash and towards investing, this is hardly the result the government would have been hoping for.'
The Role of Cash in Portfolios
Coles emphasized that cash remains essential for short-term needs, recommending three to six months' worth of essential spending in easy access accounts. However, she advised that beyond that, Stocks and Shares ISAs may be more suitable for long-term growth, as they have a better chance of beating inflation. She also observed savers moving into fixed-rate accounts as rates rise, while easy access rates stagnate.
Broader Economic Context
The article also noted a drop in mortgage approvals in May, attributed to rising mortgage rates and uncertainty from the Iran war. Coles suggested that a recent peace agreement might revive buyer confidence, but cautioned that turmoil could deter property market activity.
