Cash ISA: What are the alternatives?
Rumours are growing over expected reforms to Cash ISAs, as the Treasury searches for ways to boost its coffers.
Under the current ISA regime, savers can place up to £20,000 per tax year in a Cash ISA without paying any tax on the interest they earn.
This threshold could be reduced to £4,000 under Labour’s plans to revamp the product.
Chancellor of the Exchequer Rachel Reeves held talks with City executives to discuss the proposal, but ultimately opted not to announce any reforms in the recent Spring Statement.
Therefore, any change to the Cash ISA is more likely to be announced in the next fiscal event, the Autumn Statement.
But savers have reacted to the rumours.
According to Bank of England data, in February, they put £3.6bn into Cash ISAs, up from £3.2bn in January.
“In the short term those who have been calling for a cut to the Cash ISA allowance may well feel like their cunning plan has backfired, as savers continue to pile money into the tax shelter,” said AJ Bell head of investment analysis Laith Khalaf after the BoE data was published on March 31.
Should the government lower the amount that people can place in Cash ISAs – or abolish them entirely – savers (51 per cent) would move their money into a taxable savings account, while just a fifth would invest in UK stocks, according to AJ Bell research.
How can savers prepare for changes to the Cash ISA?
With months to go until the Autumn Statement and any changes to the Cash ISA likely to take time to bed in, savers still have time to take action in response to any potential reforms.
Adam Keen, an independent financial adviser at AAF Financial, advises savers to maximise their allowance for now. “If it does get reduced, we can always look in the future to move it to a Stocks and Shares ISA, if it’s appropriate.”
“If the government was to reduce the allowance in the Cash ISA, I believe it could be pushing savers down a more risky route, because it’s not appropriate for everyone to have the Stocks and Shares ISA, as some people are quite risk averse.”
Dom House, lead consultant at wealth management consultancy firm Simplify Consulting, says that if people want to maximise their ISA allowance, they should start to look at alternatives to Cash ISAs, such as Stocks and Shares ISAs.
“It’s obviously, from a consumer point of view, more complicated,” he says. “It’s unlikely that they have the same understanding and knowledge of what to invest in, so advice is going to be really important”.
Premium Bonds, meanwhile, are free of capital gains tax, stamp duty and income tax, and do not count towards your personal savings allowance. You can invest up to £50,000 in Premium Bonds.
Pension contributions are tax-free up to a limit. Savers will normally pay tax if their contributions into their pension pots exceed 100 per cent of their earnings in a year, or if they exceed an annual allowance of £60,000 of pension contributions per tax year – whichever is lower.
“Spreading your money between alternative tax wrappers is always the option,” says Daniel Payne, chartered financial planner at Golden Oak Wealth Management.