Here’s what you could do with your money after cash ISA cut in Reeves’ Budget

1. Money

A cut to the cash ISA limit doesn’t have to have a negative impact on your savings or your future

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Rachel Reeves is set to cut the cash ISA limit in Wednesday’s Budget, with the cap poised to drop from £20,000 to £12,000.

The proposed move, seen as a bid to encourage more people towards investing rather than only saving in cash, has prompted a mixed reaction from consumers and businesses.

Many savers will not feel the impact of a cut on a day-to-day (or year-to-year, more specifically) limit, bearing in mind the difficulty many people have in saving upwards of £1,000 per month. But they could still be hit when they come into lump sum - through inheritance, for example, or a property sale.

Either way, some people clearly want to move money before limits are cut. One cash ISA provider, Plum, told The Independent they’d seen a 49 per cent spike in the amount deposited into accounts between 15 October and 15 November.

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So what are the next possible moves for your cash, what are the rules around the different options and - the question the chancellor wants people to answer “yes” to - should you be starting to invest?

ISA limits and rules

First things first, the full ISA limit of £20,000 is not being reduced. It’s just the cash ISA limit which is (apparently) coming down.

Similar to how you can put a maximum of £4,000 into a Lifetime ISA and still put another £16,000 elsewhere, you will still be able to utilise the additional £8,000 of your annual allowance in different tax-free products.

So for example, if you had the full amount to use, you might opt to save £12,000 in a cash ISA, £4,000 in a Lifetime version and the remaining £4,000 in a stocks and shares investing ISA.

Saving still an option

If you have more than £12,000 annually to put away into savings and you want it to stay in accessible cash, you still can - you just need to be aware of tax implications.

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Basic rate taxpayers can earn £1,000 in interest before paying any tax, which is known as the Personal Savings Allowance.

Given top interest paying easy access accounts right now are about 4.5 per cent, it means you could have £22,000 in an account paying that rate and yielding £990 in interest. Nothing would be payable on that (assuming it didn’t push you into the next tax band, added to your total income).

For higher rate taxpayers, it’s a £500 limit and additional rate payers get no PSA at all.

Interest earned beyond those threshold becomes taxable - and remember it’s all interest earned, so if you have multiple accounts or income from trust funds, government bonds and even some life insurance contracts, that all goes towards the total.

The wider question from these amounts is how much you need in accessible savings. There’s more on that below.

Pension payments

Although many people have a workplace pension, that is one area which also faces probable disruption during the Budget, with limits set on how much salary sacrifice can be made before National Insurance contributions are no longer exempt.

But you can also put spare cash towards your retirement if you don’t need it in savings.

Self invested personal pensions (SIPPs) are ones you manage yourself, while many providers offer ready-made pensions or different styles depending on your age and other factors - you just pay in and they decide where your money goes, to grow over time before you need it in retirement.

Pending any changes to this type of pension in the Budget, it remains tax-efficient over time as gains inside pensions are tax free - though be aware of rules around tax for when it comes time to take money out of your pension.

Investing and ‘risk’

And so to investing. Some people have an aversion to the word itself and think “it’s not for me” - sometimes without realising it’s already what they do when they have a pension.

It simply means your money is in other types of assets rather than just cash - but if you are risk-averse and want £20,000 in your ISA each year, there are even still ways around that.

For example, some providers pay interest on uninvested cash in an investing ISA. Or, you could buy what’s known as money market funds - these are designed to be low-risk assets made up of things like Treasury bonds, short-term securities and other things. They are seen as short-term options if you don’t want to leave cash earning nothing at all, as you can still get a return and the market for them is usually liquid - in other words you can sell them quickly when you need the cash.

But this misses the wider point of investing, which is that over time, it usually can give better returns than just cash alone.

Experts generally agree that people need between three and six months of essential costs in easily accessible cash - exactly how much depends on your circumstances (secure job industry, how many dependents, and so on) and your tolerance of having a safety net.

Beyond that, extra cash which you don’t need in the next few years - if you plan to buy a house next year for example, it’s probably not for you - can often be better put to use by investing.

When products, adverts or companies talk about investing being more risky, it’s because they are legally obligated to. It doesn’t mean “you risk losing everything”, it’s more that when you take on more risk with your money, you expect to be paid more in return for that additional risk.

As such, while it can carry more risk to invest in a single company which could lose value on the stock market - or could double in value - it’s less risk to invest in a fund, a group of companies which share a common trait, such as being listed on the London Stock Exchange. So a fund is less likely to go up or down in value by as much as a single stock might do.

Whatever you decide to do with your money, it’s important to get all the details and facts first, have a clear assessment of your own needs and likely requirements in the future, then act with a plan in mind.

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