What to do if your cash ISA allowance is under threat

ISAs under threat? | Alex Hinds - stock.adobe.com

Although the Autumn Budget is still some four months away, the media rumour mill is already awash with fears that tax breaks offered to future Cash ISA savers might now be under threat.

Rachel Reeves’ Spring Statement fuelled these concerns when it revealed that ISA reform is now very much in the UK Government’s sights.

But, why might the Chancellor reduce the overall attraction of Cash ISAs ?

BOOSTING UK ECONOMIC GROWTH

The answer is quite simple. The Labour Government is committed to kickstarting economic growth, and one way of helping that is to encourage private investors to save more in stock market ISAs than in cash.

The current annual maximum that you can invest into tax-free ISAs is £20,000. This can be invested across cash, stocks and shares and up to £4,000 in Lifetime ISAs. Martin Lewis, Money Saving Expert, suggests that the Chancellor might restrict the Cash ISA allocation to as little as £4,000.

CASH ISAS AND STRATEGIC SAVING

According to the Bank of England, a record £14 billion was deposited inside these mini tax havens in April of this year alone. Some Cash ISA interest rates are currently as high as 4.85 per cent, so it is easy to understand the attraction.

Cash savings are a cornerstone to any successful financial planning strategy. They provide a risk-free pot of money against unexpected bills or financial crises, such as illness or redundancy.

However, a broader investment strategy is required to provide more attractive long-term returns to grow your wealth at a rate required to adequately fund your later life.

IGNORANCE MAY NOT BE BLISS

Even though ISAs celebrated their 26th birthday earlier this year, recent research from the Investment Association confirms that 17 per cent of the UK adult population has never even heard of a Stocks and Shares ISA.

A history lesson might help throw some light here. The IFA Magazine provided some interesting ISA performance comparisons in February, confirming such ignorance has indeed proved costly.

It found an investor who made an annual investment of £1,000 into an ISA in the global sector when the government originally introduced ISAs in April 1999 would have made £49,211 more compared to someone saving exclusively in an average Cash ISA. Past performance is, of course, no guide to future returns and your capital is at risk when invested in stocks and shares.

Long-term history shows that stock market returns are more likely to grow your capital to outstrip inflation than the alternative of leaving it in a cash deposit.

THE RULE OF 72

The “rule of 72” is a straightforward way of using the power of compound interest to estimate how long it could take to double the value of invested capital.

You simply divide the number 72 by the fixed annual investment rate of return you are earning. The answer is the number of years it will take to double your money.This rule illustrates how an overdependence on cash returns can lead to an underperforming investment strategy. For example, even at a fixed interest rate of 5 per cent it will still take you almost14 and a half years to double your money in a Cash ISA.

By contrast, the average annual return from an investment in the MSCI World Stock market Index over the last 20 years was 10.9 per cent. This level of return could double your money every6.6 years, assuming it’s fixed.

A change in the Autumn Budget that prompts you to reconsider your current ISA investment weighting between cash and stocks and shares might prove to be a profitable over the long term.

An investment in the stock market is more volatile than a cash deposit, so you need to be happy with putting your capital at risk before considering it. Clearly defining your appetite for investment risk as well as establishing your long-term financial planning goals are key to any decision.It could be an opportune time to have a chat about this with your financial planner.

New name. Same team. Broader capabilities

Following the merger of London & Capital and Waverton Group, Waverton Wealth is now W1M. As a unified team operating under one brand, we can now bring you the very best of everything we do – an exceptional breadth and depth of global wealth management, combined with institutional-quality investment management.

Find out more here