Hargreaves Lansdown (HL) has launched a new Stocks and Shares ISA designed as a workaround for savers affected by the upcoming cut to the Cash ISA allowance, offering cash-like returns through low-risk investments.
The account allows savers seeking cash-like security to invest in money market funds, which aim to generate slightly higher returns than cash while providing a place to hold rather than grow savings.
New Cash ISA limits from April
Under new rules, the Cash ISA limit for under-65s drops from £20,000 to £12,000 from April next year. Savers under 65 can put up to £12,000 into a Cash ISA, with the rest going into non-cash ISAs such as a Stocks and Shares ISA.
Former Chancellor Rachel Reeves had aimed for the new Cash ISA rule to encourage more people to invest in a Stocks and Shares ISA.
Government ban and avoidance
To stop savers getting round the Cash ISA cap, the Government announced a ban on holding 100% of a Stocks and Shares ISA in money market funds. However, the rule can be avoided by holding even just a penny in another product.
Money market funds are low-risk investments which offer somewhere to hold rather than grow savings while aiming to generate a slightly higher return than cash.
Growing demand and costs
Alex Lambert from Hargreaves Lansdown said: "Thinking about those clients who are using their £12,000 limit and then are still scared to invest and would use this as a workaround, we've invested quite heavily into our overall cash management range."
HL said demand for money market funds has grown from a few thousand five years ago as interest rates have climbed to more than 5% since 2022. Over the last year, demand for such funds increased by 35%, with almost £7billion invested last year.
Anna Macdonald, Investment Strategy Director at HL, said: "There was a sense inflation is here and money market funds are a low-risk place to hold cash in investment accounts. It made a lot of sense."
Ms Macdonald, quoted by the Telegraph, added: "We have already seen strong and growing demand. Interest has grown because of the cash Isa changes coming in from April."
HL's money market fund includes an ongoing charge of 0.06% or 60p per £1,000 invested, a 0.35% platform fee, and a £1.95 dealing charge. It anticipates a yield of 3.95% on its cash-like fund, according to reports.
Mr Lambert said HL sees a lot of its new clients becoming investors after initially opening a cash product and that cash plays an important part in that journey.
