Chancellor Rachel Reeves is set to announce a significant reduction to the cash ISA allowance in Wednesday's Budget, slashing the annual limit from £20,000 to £12,000.
The proposed change, viewed as a strategic move to incentivise investment over traditional cash savings, has generated a mixed response from both the public and financial institutions. While many savers may not be immediately affected due to the challenge of saving large sums monthly, the change could impact those who receive lump sums, such as inheritances or proceeds from property sales.
This anticipation has already influenced consumer behaviour. One cash ISA provider, Plum, reported to The Independent a 49 per cent surge in deposits between 15 October and 15 November, as savers look to utilise the current higher limit before it potentially changes.
Understanding the New ISA Landscape
It is crucial to note that the overall annual ISA subscription limit of £20,000 remains unchanged. The reduction applies specifically to the amount that can be placed into a cash ISA.
Similar to the existing rules for Lifetime ISAs, where a maximum of £4,000 can be allocated, you will still be able to use the remaining £8,000 of your annual allowance in other tax-free wrappers. For instance, an individual with the full £20,000 to save might now choose to put £12,000 in a cash ISA, £4,000 in a Lifetime ISA, and the final £4,000 into a stocks and shares ISA.
Alternatives for Your Savings and Investments
If you wish to save more than £12,000 annually in accessible cash, you still can, but you must consider the tax implications. Basic rate taxpayers benefit from a Personal Savings Allowance of £1,000 in tax-free interest.
With top easy-access accounts currently offering around 4.5 per cent, you could hold approximately £22,000 in such an account and earn £990 in interest without incurring a tax liability, assuming it doesn't affect your income tax band. Higher rate taxpayers have a £500 allowance, while additional rate taxpayers receive no Personal Savings Allowance.
Another avenue to consider is pension contributions. Despite potential changes to workplace pension rules in the Budget, Self Invested Personal Pensions (SIPPs) remain a tax-efficient long-term option, as growth within the pension is free from tax.
And then there is investing. For those with an aversion to risk, it's important to recognise that pensions are a form of investment. If you are determined to use your full £20,000 ISA allowance but are cautious, some providers pay interest on uninvested cash within an investing ISA. Alternatively, low-risk money market funds, which consist of assets like Treasury bonds, can offer a return while keeping funds relatively accessible.
Financial experts typically recommend keeping three to six months of essential expenses in an easily accessible cash savings account. Any surplus funds not needed for the next few years could potentially achieve better returns through investing. Risk in this context often relates to volatility; investing in a diversified fund is generally less risky than investing in a single company's stock.
Whatever path you choose, it is vital to gather all the facts, conduct a clear assessment of your current needs and future requirements, and proceed with a well-defined financial plan.
