Cash ISA cut – the devil will be in the detail

Jason Hollands, Managing Director of Bestinvest, the online investment platform and leading Stocks & Shares ISA provider, comments:

“In her Budget yesterday, Chancellor Rachael Reeves confirmed a heavily mooted decision to cut the amount that can be saved into Cash ISAs, which will be reduced to £12,000 from April 2027. The main ‘rabbit out of the hat’ was that over 65s will be exempt from the reduction and will still be able to subscribe up to £20,000 of the overall ISA allowance into cash. For now, cash savers can still plough up to £20,000 into Cash ISAs in both the current and next tax year, sheltering a potential £40,000 of savings from the taxman ahead of the 2% increase in tax on savings being introduced.

“The move to limit Cash ISAs isn’t ideal as it reduces flexibility, and it is unlikely to drive more people to become investors, but frankly it could have been worse.

“But as the dust settles on this news, there remain some important unanswered questions about how this will work in practice.

“Firstly, under current flexible rules, it is possible to transfer a Stocks & Shares ISA into a Cash ISA and vice versa. Without a change to restrict this in some way or even stop it altogether, there would be nothing to stop someone opening a £12,000 Cash ISA and up to £8,000 in a Stocks & Shares ISA on top, only to then transfer the latter into Cash ISA shortly after.

“And another issue to consider is whether cash savers with more than £12,000 to shelter, won’t just arbitrage the cap by opening a Stocks & Shares ISA with the excess and then leave their money parked in cash. Investment platforms, like Bestinvest, all enable people to open ISA accounts with cash that is awaiting investment.

“While cash rates on most investment platforms used to be very low (if any interest was paid at all) these have improved since the FCA wrote to providers in December 2023 highlighting their concerns.

“The devil is always in the detail, and it remains to be seen whether the ISA rules will be changed to tighten up the rules which will be seen as loopholes - perhaps time limiting the holding of cash within a Stocks & Shares ISA and potentially halting or restricting the ability to transfer Stocks & Shares ISAs into Cash ISAs. For that we will have to wait and see.

“Finally, Junior ISAs appear have escaped all this scrutiny. Given these accounts cannot be accessed until the child turns 18, in most cases they are long-term in nature, it has always struck me as disappointing that the majority of JISA accounts subscribed to go into cash rather than investments. The Chancellor says she wants more people to benefit from investing: a good place to have started would therefore have been driving these accounts towards investing rather than cash. After all, if young people can see the benefits of investing at the start of their adult lives, wouldn’t that be a great thing for changing behaviour?”