The “will she/won’t she” speculation of the last 8 months is finally over as the Chancellor confirmed in yesterday’s budget that there will be reductions in how much people are allowed to contribute to cash ISAs in a given tax year.
Specifically she announced that from 6th April 2027 the maximum contribution in any tax year to cash ISAs will be capped at £12,000. The individual total allowance remains at £20,000 but with cash limited to £12,000, you will only be able to exploit your full annual allowance if at least £8,000 is into stocks & shares ISAs. (You can of course choose to put a greater share than that into stocks & shares up to the £20k limit).
However in what appears to be a sop to banks and building societies who use cash ISA deposits as a cheap source of funding, the rules are confusingly different for over 65 year olds who can still put up to £20,000 into cash ISAs.
There are no changes to rules around Junior ISAs so contribution allowances remain at £9,000 per child and can be split however you choose between cash and stocks & shares Junior ISAs such as Beanstalk’s.
So what is behind this change?
Many of the announcements in the budget focussed on raising taxes and she may indeed raise a bit more tax by the ISA allowance change if people continue to put the same amount into cash savings, as some of it will now attract income tax. However I believe the motivation behind the changes is much more about encouraging people saving for the long term to invest rather than putting money into a saving account.
On a number of occasions the Chancellor has expressed her concerns that many people in the UK are too risk averse when it comes to investing and are therefore missing out on potential returns. Earlier this year for example she told broadcasters: “It is really important that we support people to save to achieve their aspirations. I do want to create more of a culture in the UK of retail investing like what you have in the United States, to earn better returns for savers. At the moment, there is a £20,000 limit on what you can put into either cash or equities (ISAs) but we want to get that balance right.”
As I have written about many times, shares have historically outperformed cash particularly over longer multiple year time periods. Using cash rather than shares for longer term saving such as with Junior ISAs or ISAs where the intention is to leave money for a number of years can mean that you are missing out on potential growth. Not unsurprisingly therefore, given that Beanstalk only offers stocks & shares ISAs and JISAs, I am supportive of a change that encourages people to invest when saving for the longer term.
Investing of course carries risks in that the value of shares can go up and down. Some people just don’t want to take risk so prefer the certainty of cash and, depending on the time period and what you are saving for, cash might be better for you than stocks and shares. In particular, you may not want to incur the risk of losses if you need cash in a hurry and are a “forced seller” at a time you don’t want to be.
In general though we believe that putting money aside for the future is a good thing and clearly ISA allowances play an important role in encouraging people to do this, both through the tax benefits and the simplicity of not having to report income or gains in tax returns to HMRC. Cash and investments can both play a role in people’s savings so I welcome the fact that there was no reduction in people’s overall allowances.