Cash ISA warning as savers need to take ’emergency action’ to avoid £4k cap | Personal Finance | Finance

Rachel Reeves’ reported plan to lower the annual limit people can save tax-free in a cash ISA appears to have prompted savers to take “emergency action”. A record £14billion was deposited in cash ISAs in April as Brits looked to shield their hard-earned money from the taxman. Reports that the Chancellor will unveil plans to cut the cash ISA limit from £20,000 to £5,000 or less at her Mansion House speech on July 15 threaten to unsettle some savers and raise questions about how best to protect savings.

The Daily Telegraph’s Money Editor, Sam Brodbeck, suggested the limit could sink as low as £4,000 in the publication’s From the Editor newsletter. He explained how older savers who don’t want to put their savings at risk in volatile stock markets will be forced to move their money into non-ISA accounts, which would be taxed.

He said that if the cash limit is reduced, it would still be possible to keep cash in a stocks and shares ISA if you want to. Stockbroker Hargreaves Lansdown pays 2% interest on the first £10,000 in cash held in its stocks and shares ISA.

Cash could also be transferred to a spouse if they earn less, thus taking advantage of tax-free allowances.

Experts are divided on the merits of cutting the tax-free cash ISA allowance, a move first reported by the Financial Times. Investment banks and asset managers appear keen to see more money invested in stocks and shares, but building societies use cash ISA money to make loans.

Money Saving Expert founder Martin Lewis has said the Government should be offering carrots and not sticks to get Brits investing more in stocks and shares.

Brian Byrnes, Head of Personal Finance at savings provider Moneybox, said: “The current speculation around potential changes to the cash Isa is undoubtedly already causing uncertainty and confusion for consumers.

He warned that this will weigh particularly heavily on first-time savers and those with less financial confidence, who he said will naturally be more hesitant to explore new products.

Mr Byrnes said: “Simply cutting the tax-free allowance on cash ISAs will not necessarily prompt equal inflows into investing products either.

“People opt to use cash Isas over their stocks and shares counterparts for a multitude of reasons, including risk aversion, and reducing the amount of money these savers can put into the cash Isa is unlikely to change this mindset.

“Cash ISAs are perfect for anyone looking to build up emergency savings and achieve their short—to medium-term financial goals.

“Once people have the peace of mind and security that cash savings provide, they are more likely to have the confidence to start investing for their future.”

Michael Healy, UK Managing Director of trading platform IG, called for cash ISAs to go. He said: “We’re calling for the cash ISA to be scrapped altogether, so we can start channelling more tax relief and long-term wealth into reviving the UK stock market.

“Successfully building a culture of investing would have a seismic impact.”