Speculation is rife that the Cash ISA is about to go undergo some significant surgery. There have been murmurs that these tax-efficient products could be scrapped altogether.
There’s also talk that the £20,000 annual allowance could be trimmed back to just £4,000.
Supporters of a radical overhaul believe it could ignite investment in higher-yielding assets like shares, boosting individuals’ retirement pots while giving a leg-up to the British economy.
Rumours are certain to continue swirling ahead of next month’s Spring Statement. But following government comments this week, it appears change is coming down the tracks in some way, shape or form.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Change is coming
On Thursday (20 February), chancellor of the exchequer Rachel Reeves said: “At the moment, there is a £20,000 limit on what you can put into either cash or equities [via the Stocks and Shares ISA], but we want to get that balance right.”
Tellingly, she added: “I do want to create more of a culture in the UK of retail investing like what you have in the US to earn better returns for savers and to support the ambition to grow the economy creating good jobs right across the UK.”
Reeves’ comments would have sent a shiver down the spine of many savers. Investing isn’t for everyone, and some prefer the security and the simplicity of just holding cash on account instead of buying shares, trusts and funds.
Embracing opportunity
As a Cash ISA holder myself, I’m hoping the chancellor resists wholesale changes to this popular product. I don’t fancy having to pay tax on the interest my savings generate.
But any modifications might not be the disaster some Cash ISA users fear. It may even provide the opportunity that the chancellor believes could supercharge all of our retirement funds.
And if done the right way, Britons can embrace this new reality without burdening themselves with too much risk.
Diversifying for safety
By holding a diverse selection of shares, investors can greatly reduce the danger to their hard-earned cash. A portfolio of, say, 10-15 shares across different sectors can balance risk, provide exposure to a multitude of investing opportunities, and deliver a stable return across the economic cycle.
A simpler way to diversify is by buying an investment trust or an exchange-traded fund (ETF) that invests in a basket of assets. The iShares FTSE 250 ETF (LSE:MIDD) is one such fund that risk-averse individuals may wish to consider.
The fund invests across the whole of the FTSE 250 index. So it has holdings in a wide spectrum of companies including retailer B&M, broadcaster ITV and insurance provider Direct Line.
Funds like this aren’t totally without risk and may fall during broader market downturns. But over time they’ve also proved to be effective ways to build wealth in a low-risk way.
FTSE 250 funds like this one have provided an average annual return of around 9% in the last 20 years. That’s also higher than the return Cash ISAs have delivered over the same timeframe.
I believe it’s wise to retain some cash held in a savings account, regardless of any tax liabilities on the interest. But with changes to the Cash ISA likely approaching, now could be a good time for us to explore additional (and potentially superior) ways to grow our money.
