Image source: Getty Images
Chancellor Rachel Reeves has slashed the annual Cash ISA limit by £8,000 to £12,000 to encourage more people to invest in UK stocks. The change comes into force from April 2027 for those aged under 66.
But will it work? And which UK stock is worth considering for a new investor thinking about starting a Stocks and Shares ISA?
The benefits of investing
Stepping back, I agree with the sentiment behind this move. As Sarah Coles, head of personal finance at Hargreaves Lansdown, points out: “We need an investment culture in the UK, and some of the money that has been saved in Cash Isas would work harder for people if it was invested instead.”
This is indisputable, with all evidence showing that investing wipes the floor with cash when it comes to long-term returns. And an investor doesn’t have to be a mastermind like Warren Buffett to do well in the stock market.
For instance, someone who invested £20,000 in a simple tracker like the Vanguard FTSE 100 ETF (LSE:VUKG) five years ago would now have £41,100. For cash, it would likely have been less than £23,000 (not even beating inflation).
Will savers switch?
Yet, despite all the evidence that stocks outperform cash, I’m not convinced most savers will suddenly become investors. According to new research from KPMG UK, 87% of adults with Cash ISAs won’t invest in stocks when the allowance is reduced.
Therefore, the impact on UK stock prices is likely to be minimal, in my opinion. But at least it’s a start.
Savers remain firmly rooted in cash, with many unlikely to pivot into equities even if the Cash ISA allowance is cut. This is particularly true for 18 to 24-year-olds, who, despite having the longest investment runway, are among the least inclined to move into stocks and shares. Neil Connor, Head of Wealth and Asset Management, KPMG UK.
This is sad to read because a 20-year-old starting out today could set themselves up for an incredibly comfortable retirement. For example, investing £500 every month at an 8% return would lead to a £2.4m ISA portfolio by the time they are 65!
The simple ETF
So what about someone who is thinking about switching money from cash to stocks? What do I think is worth considering?
Well, returning to the FTSE 100 ETF above, I think this might be a good choice right now. At least as a steady starter option for cautious investors.
It gives instant exposure to all the stocks in the blue-chip index, including heavyweights like AstraZeneca, HSBC, and Rolls-Royce. And this version of the ETF is accumulating, which means it automatically reinvests dividends back into the fund.
Moreover, unlike the S&P 500, it doesn’t have a lot of concentrated tech exposure. So the index could reduce near-term volatility if fears of an AI bubble provoke a serious tech stock sell-off.
That said, if investors turn bearish on UK equities, which happened both after the financial crisis and Brexit, then the index could underperform for a while.
Alternatively, a braver investor could take the plunge with individual FTSE 100 stocks. That’s arguably a bit more risky, but the potential returns can be significantly higher.
Just look at Rolls-Royce — the engine maker’s shares are up more than 1,000% in three years!
This story originally appeared on Motley Fool
