Cash ISAs are rumoured to be back in the Chancellor’s sights as she prepares her Autumn Budget.
Chancellor Rachel Reeves is set to “revive plans” for reform of cash ISAs, said the Financial Times, “to divert tens of billions of pounds of savings from cash into domestic stocks” and boost an investment culture in Britain.
Her previous Budget mentioned a review of the ISA system, and Reeves is now reported to be considering halving the cash ISA allowance to £10,000 in her next fiscal update on 26 November.
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The hope is that this would “help boost economic growth while also providing better returns for savers”, said MoneyWeek.
However, it is unclear whether there will be any changes, and savers will still have time to take action in response to any potential reforms.
Savings accounts
Currently, savers can earn £1,000 of interest tax-free using the personal savings allowance, dropping to £500 for higher-rate taxpayers.
It may be worth putting money into a standard savings account instead of a cash ISA, said Rest Less, especially if “you’re confident that your returns won’t exceed your allowance”. But be warned, you don’t need “much money in savings” to breach the allowance.
A higher-rate taxpayer would go over their £500 personal savings interest allowance once their savings go above £11,000, while a basic-rate taxpayer would be hit once they have more than £22,000 saved.
Stocks and shares ISAs
Investing in the stock market through a stocks and shares ISA “can potentially gain more growth over time”, said Unbiased, compared with a cash ISA.
You can also lose money, “sometimes even all of it”, but on average, stock markets “consistently outperform most cash savings over longer periods”.
Money market funds
Investing in a money market fund serves a “very similar purpose” to a traditional savings account, said Fidelity.
A money market fund invests in different types of short-term debt, such as Treasury bills and certificates of deposit. The holdings in a money market fund are “very high quality, liquid and diversified”, the investment platform added.
They are “low-risk and stable”, but they are still an investment, so their value could drop “even if the chances of this are slim”.
Premium Bonds
Rather than paying interest, Premium Bonds offer customers the chance to win between £25 and £1 million tax-free in a monthly prize draw. The product is provided by National Savings and Investments and is backed by the government.
Here, the excitement of winning a tax-free prize is combined with the safety of a government-backed institution, which is what continues to make the option enticing to many.
But the odds of winning are low at 22,000 to one for every £1. There is no guarantee that you ever will win a prize, said MoneySavingExpert, and you “could earn nothing”.
Pension savings
Pension contributions benefit from an “effective 25% boost” thanks to tax relief, and all growth is tax-free too, said Unbiased.
You can withdraw the money in your pension from age 55, so putting more money into your retirement savings instead of a cash ISA shouldn’t be “discounted as an option”, especially if you are in your late 40s or older.
