Major reforms to Individual Savings Accounts (ISAs) announced by the Chancellor could have significant consequences for savers, particularly those approaching retirement. In the Autumn Budget, Chancellor Rachel Reeves revealed plans to alter how the annual £20,000 ISA allowance can be used, a move experts warn may penalise prudent savers prioritising security over investment risk.
The New ISA Allowance Structure
From April 2027, the current flexible £20,000 allowance will be split into distinct portions. Savers will only be able to allocate a maximum of £12,000 to either cash ISAs or stocks and shares ISAs. The remaining £8,000 of the allowance must be placed into stocks and shares ISAs. The government's stated aim is to encourage more people to invest for the long term.
However, this effectively reduces the amount that can be sheltered in low-risk, tax-free cash savings. A notable exemption exists for savers aged over 65, who will retain the current, unrestricted ISA allowance and will not be subject to the new rules.
Retirement Savers at Risk
Financial planners have raised the alarm, stating the changes unfairly target responsible individuals who have built substantial cash ISA pots. Henrietta Grimston, a financial planner at retirement specialist Saltus, explained that clients with large cash ISAs are often not seeking high returns but value security, flexibility, and peace of mind.
"For many, cash ISAs offer a simple and low-risk way to manage their savings without worrying about market volatility," Ms Grimston said. "Reducing the allowance risks penalising these sensible savers, making it harder to build tax-efficient pots for the future."
She highlighted that those nearing retirement could be hit hardest, as "tax taking a greater bite out of any growth." This could diminish the overall efficiency of their retirement plans, forcing them to save more to reach the same target. Furthermore, it risks pushing individuals into more complex tax situations, potentially requiring them to submit tax returns for the first time.
Calls for Broader ISA Reform
Alongside criticism of the new allowance structure, experts are urging the government to streamline and improve other ISA products. Ms Grimston pointed specifically to the Lifetime ISA (LISA), which currently allows annual contributions of up to £4,000 with a 25% government bonus, for either a first home or retirement after age 60.
She advocated for making the LISA more flexible to adapt to changing life circumstances. "A wider review of ISA rules – particularly for more targeted products like the LISA and the Innovative Finance ISA – would also be a welcome step in helping savers better navigate their options," she added.
The coming years will require careful financial planning for UK savers, as these HMRC changes reshape the landscape of tax-free saving and investing from 2027 onwards.
