Why the new Cash ISA limit stands to compromise simplicity, flexibility and choice within a Stocks & Shares ISA – by Rob Morgan, Chief Investment Analyst at Charles Stanley
Often Budget changes come with ‘devil in the detail’ and that seems particularly apt regarding changes to Cash ISAs slated for April 2027.
On the face of it, things are simple enough. Under 65s get a lower annual Cash ISA allowance of £12,000 rather than the full £20,000. Utilising the remainder of the overall allowance will necessitate a a Stocks & Shares ISA, so a nudge for people to consider investing once they have accumulated a certain amount of savings.
Yet proposed rules aimed at preventing people circumventing the new structure could have significant consequences for investors in Stocks & Shares ISAs.
At present it’s possible to shift a Stocks & Shares ISA to a Cash ISA – and vice versa – but given the smaller cash allowance the government now intends to clamp down on transfers to Cash ISAs. Otherwise, it would be possible to open a £12,000 Cash ISA and £8,000 in a Stocks & Shares ISA on top, later transferred to the Cash ISA.
A second ‘loophole’ is the ability to hold cash in a Stocks & Shares ISA and receive tax free interest or invest in investments that are supposedly “cash like” such as money market funds. The supplementary Budget document implies two measures to close this off: interest on uninvested cash incurs a “charge”, making returns less competitive; and that cash like investments become ineligible for ISAs.
Risk management to be compromised?
It is unclear which instruments might be banned, but money market funds and cash-based ETFs may be first in the firing line.
These are used extensively by investors taking a more cautious approach or wishing to reduce overall portfolio volatility; changes that target them could compromise everyday risk management, including implementing a glidepath to withdrawal.
This could severely impact diversified portfolios being managed in ISAs by either USNewsRanks or investment professionals, forcing an unpalatable choice between more risky investments or a poor return from holding a cash balance.
It also implies the possibility of a messy ‘two tier’ ISA investment eligibility system, for under 65s versus over 65s, which as well as being potentially inequitable would be exceptionally challenging for most ISA providers to implement.
A more siloed ISA system?
The more impactful rule for many people is the removal of the valuable flexibility to transfer from a Stocks & Shares to a Cash ISA under the age of 65. It’s perfectly reasonable for people to do this as their needs change, for example when drawing on money in the event of a house purchase or large renovation.
If ISA transfers are a one-way street to Stocks & Shares from Cash, until the age of 65, the system stands to be further siloed. It makes it harder for people to change course from investing as their circumstances evolve, especially in the absence of cash equivalent options in a Stocks & Shares ISA.
The proposals are not yet final, they are subject to industry consultation and are yet to be written into law. There is opportunity to debate the key aspects to align government intentions with the practicalities faced by ISA providers, investment professionals and USNewsRanks.
We urge investors to keep in mind that any changes are subject to this, and in any case won’t be implemented until April 2027. In the meantime, it is best to continue as normal but keep an eye on how these changes may impact ISAs in the future.
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