The Times asked our resident expert, Moneybox’s Head of Personal Finance Brian Byrnes, his thoughts on possible changes to future Cash ISA allowances and if it’s too late to open a Cash ISA to get the full £20,000 annual allowance.
Here’s what he said:
In short, no, it’s not too late to open a Cash ISA and take full advantage of your £20,000 annual tax-free allowance. With the Chancellor, Rachel Reeves, confirming in the Mansion House speech plans to consider changes to ISAs in the future to help achieve their goals of getting people to invest more, we will have to wait and see how this will impact savers. For now, there will be no changes to Cash ISA allowances.
In the scenario that Cash ISA allowances are cut in the future, it is expected that any action will not be retrospectively enforced, meaning if you saved the full £20,000 into a Cash ISA this year or have accumulated over £20,000 from previous years, it will most likely not be impacted by any future changes.
But you shouldn’t wait for a decision to be announced to start thinking about using your ISA allowance. It’s always good, where possible, to use your ISA allowance as early in the year as you can. Historically, this has been due to the benefit of compound interest. The longer you have your money in a tax wrapped account (such as ISAs) the longer it has to grow tax-free. This is true of the Cash ISA and also the Stocks & Shares ISA.
This year however, there is additional political risk. The government has for the last 6-12 months been talking about “getting the balance right” between Cash ISA savings and Stocks & Shares ISA investing. While it is not expected that any change to the Cash ISA limit would happen immediately, it cannot be completely ruled out. Therefore, if it’s affordable, it is another reason to move money into an ISA sooner rather than later.
While I do not agree with the means that the government is considering i.e. lowering the Cash ISA limit, their objective to get more people investing is worthwhile. We are a nation of fantastic savers but many people could be investing more than they currently are. From a practical perspective, it may be worth really considering if the right thing for you is to use 100% of your ISA allowance with the Cash ISA, or whether this year is the year to consider using some of your allowance with a Stocks & Shares ISA. Remember, you can mix and match, using some of your £20k allowance with cash savings and some with investing.
Another ISA you could consider is the Lifetime ISA. If you are under 40, you can put £4,000 into a Lifetime ISA each tax year and the government will top it up by 25%. The £4k does form part of your overall £20k ISA allowance but the government bonus does not so it’s actually a way of getting £21,000 into ISAs in one tax year.
It’s important to remember your ISAs can be used for different financial goals. A Lifetime ISA can be of use for major life goals such as retirement or buying your first home; a Cash ISA is more suitable for short-term savings goals or emergency fundsFunds, also called ‘tracker funds’, are financial instruments that have been set up to match or ‘track’ the price of a market index. Investing in a fund lets you get exposure to different financial assets like shares and bonds, without having to buy them directly.; a Stocks & Shares ISA is designed for long-term investments (over five years), aiming for higher returns.
A 25% government penalty applies if you withdraw money from a Lifetime ISA for any reason other than buying your first home (up to £450,000) or for retirement, and you may get back less than you paid into your Lifetime ISA.
Capital is at risk. All investing should be long term. The value of your investments can go up and down, and you may get back less than you invest.
Tax treatment depends on individual circumstances and may be subject to change in the future.