Cash ISA savers urged to make major change
Savers may be able to keep some of the the benefits of cash ISAs, even if the tax-free account is scrapped or has its allowance cut.
Brits concerned about expected changes to the cash ISA are being urged to take advantage of low-risk versions of stocks and shares, or investment, ISAs instead. An expert is urging savers to consider putting their £20,000 investment ISA allowance into money market funds or low risk bonds.
Peter Rice, investment adviser at Moneyfarm, said: “Stocks and shares ISAs, often viewed through the lens of carrying significantly greater risk, can in fact offer a spectrum of lower-volatility options suitable for cautious or short-term savers. There is a range of alternatives—money market funds or low-risk bonds, to name a couple—which can help people adopt a cautious position whilst still making use of the full £20,000 allowance."
If Rachel Reeves goes ahead with plans to either scrap or reduce the tax-free benefits of the cash ISA, millions of savers would, in theory, have to find another home for their cash savings.
The chancellor is believed to have discussed limiting the cash ISA allowance from £20,000 to £4,000 a year.
Reeves is not believed to be considering any changes to stocks and shares ISA. These are more risky but do have the potential to grow more than cash ISAs, AJ Bell claimed £1,000 saved every year in a cash ISA since April 1999 when the product was launched, and earning the average Cash ISA rate over that almost 26-year period, would have turned into £34,392.
However, if that same £1,000 a year was invested in global stockmarkets it would have turned the £26,000 investment into £83,603.
She said a rise in interest rates had meant these funds had been included in more stocks and shares ISAs.
What is a money market fund?
According to Nunn money market funds invest in a portfolio of short-term cash deposits, money market instruments and high-quality bonds. She said they are designed to provide a high level of stability and liquidity while also delivering a modest investment return that has the potential to exceed short-term cash deposit in a bank or building society.
She said: "The point about money market funds is that they aim to deliver a return either over and above the Bank of England’s base rate or the Sterling Overnight Index Average (which is a benchmark for short-term lending between financial institutions). Of course, this isn’t guaranteed. But given the still high interest rate, it does potentially offer an attractive return for risk-averse investors."
Fidelity said the top selling money market funds on its platform that had been chosen by ISA savers included the Fidelity Cash Fund, Royal London Short Term Money Market Fund and the Legal & General Cash Trust.
Warning: Before investing any money be aware that you could stand to lose your original capital (amount invested) as well as any potential growth. Always shop around and do your research before making a deposit.