Rachel Reeves has confirmed changes to the annual ISA allowance.
In today’s Autumn Budget, the Chancellor announced that while the £20,000 annual ISA allowance would remain, she would designate £8,000 of that amount for stocks and shares.
This means the annual cash ISA allowance is being cut from £20,000 to £12,000.
In the run up to the Budget, warning were sounded that, in the event of such a cut to the cash ISA limit, building societies could be forced to raise their mortgage rates.
In her statement, Reeves justified the changes to the ISA rules by claiming that the UK has some of the lowest rates of retail investment in the G7, while some people would have fared better by invested in stocks and shares, as opposed to putting their money into a cash ISA.
“HUGE GROWTH POTENTIAL”
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “We need an investment culture in the UK. The Chancellor’s calculation that investing instead of saving in an ISA could have left you £50,000 better off demonstrates the huge growth potential offered by investment.
“However, it remains to be seen whether the cut to the cash ISA will have the impact the Treasury is hoping for.
“There will be people for whom cash ISAs are the most sensible home for their money, especially if they’re saving for the short term, have significant sums of cash and are a higher earner, so they won’t want to move into investment.
“There will be those who should be investing instead, but the gamechanger here will be changes in the pipeline to allow businesses to provide more targeted support and give people the help they need to take advantage of the enormous growth potential of investment. It’s the carrot that’s going to be effective here: not the stick.”
A cash allowance of £20,000 will remain for those aged over 65 and these changes will not take place until April 2027.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, explained the thinking behind the decision to insulate over-65s from the change: “Bringing in separate rules for people over the age of 65 is aimed at helping retirees, who often need bigger cash balances. The change will enable them to move money from a stocks and shares ISA into a cash ISA as they derisk.”
MAJORITY OF SAVERS UNAFFECTED
Sarah Pennells, consumer finance spokesperson at Royal London, said: “The Chancellor’s confirmation that the cash ISA limit will fall to £12,000 from April 2027 won’t affect the majority of ISA savers. Our research shows that only 16% of ISA holders save or invest the maximum £20,000 annual allowance.
“The fact that the full £20,000 cash ISA allowance is being retained for those over the age of 65 will be welcome by those pensioners who rely on cash savings to boost their retirement income, but who don’t necessarily want to invest.
“The FCA has estimated that there are 8.6 million people with £10,000 or more in cash savings that could be invested. Our research shows that six in 10 people with money in cash ISAs could be persuaded to invest in a Stocks and Shares ISA.
“However, it also shows that concern among consumers that they don’t have enough money to invest, and a lack of understanding of investing, are among the main barriers. Reducing the cash ISA limit will do nothing to address this.
“However, the introduction of Targeted Support, from April, will enable financial providers to offer personalised guidance to those who don’t have an adviser, which could encourage some who previously haven’t thought about investing, to do so.”
