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The October Budget brought a surprise for Stocks and Shares ISA savers. From April 2027, under 65s will still be able to keep their full £20,000 ISA allowance in cash tax-free, rather than the proposed reduction to £12,000.
That means that the proposed 22% charge on interest earned on cash above £12k will not go ahead.
The initial reaction for many investors is probably relief. But I fear this makes it too easy to keep too much money in cash.
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.
What’s changed?
The overall ISA allowance remains £20,000 per tax year, allowing holders to split it however they want between cash and investments.
The government has also dropped proposed restrictions on money market funds and transfers from Stocks and Shares ISAs into Cash ISAs. Instead, it plans to explore a new incentive for people investing in an ISA for the first time.
The details and timing haven’t been confirmed but the direction of travel’s clear: the government wants more people to consider investing, not just saving.
Why retirement investors should care
For anyone approaching (or already in) retirement, the U-turn adds some advantage. Cash can be useful for day-to-day spending and emergency costs, avoiding the need to sell investments during a market wobble.
But cash isn’t a retirement strategy. Over long periods, shares and dividend-paying companies have historically offered a better chance of growing both income and capital. They can fall sharply though, and past performance doesn’t guarantee future returns.
That’s why the ISA matters – dividends and capital gains compound more aggressively inside an ISA without UK tax friction. Sure, the ISA also protects cash from tax, but investing in shares gives that money a job.
Putting cash to work
M&G‘s (LSE:MNG) a good stock to consider if you’re holding too much spare cash. It’s an income-oriented UK financial services company, and its dividend can be reinvested inside an ISA to supercharge growth. Later, in retirement, those payments can then be drawn as income.
The company’s latest half-year results, published in October, showed adjusted operating profit rising 15% to a record £435m. It also reported £2.4bn of net inflows from open business.
The share price has performed well too, gaining around 20% over 12 months and 58% over five years, before dividends.
So what’s the catch? The same half-year period produced a statutory IFRS post-tax loss of £165m, driven by £551m of adverse short-term investment movements. That exhibits just how reliant profits are on the market, which can impact the company’s financial performance and put dividends at risk of a cut.
But investors needn’t focus on one particular company. The point of this example is how cash held in an ISA can either sit idle, or be invested to increase potential returns.
The bottom line
The October Budget gave savers their options back, but the trick is knowing how to use that gift optimally. Sitting on cash may feel safe, but historical evidence suggests it’s not the best use of funds.
So while the cash ISA U-turn may give you reason to breathe more easily, it’s not a reason to stop investing.
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This story originally appeared on Motley Fool
