Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.
Chancellor Rachel Reeves is expected to announce a cut to the cash ISA allowance in her Budget this month, in a push to get the UK investing in the stock market instead.
People who like the low-risk nature of cash are alarmed, and some commentators have accused the government of betraying prudent savers. The reaction is understandable - but may be overblown. After all, there is a simple way to generate tax-free, cash-like returns without a cash ISA: you can buy a money market fund instead.
How could the government change cash ISAs?
Everyone has a £20,000 annual ISA allowance, which allows them to grow their savings and investments tax-free. Currently, individuals can divide the allowance any way they wish. If so inclined, they can put the full amount in cash and nothing in shares - or vice versa.
However, Reeves is expected to limit how much money can be stored in cash accounts, while keeping the overall allowance at £20,000. This would mark the biggest overhaul of the ISA regime since it was introduced in 1999 by then-chancellor Gordon Brown.
Media reports suggest the cash ISA limit could be lowered to £10,000, but nothing has been confirmed yet.
Where else can I put my money?
Money market funds - also known as cash funds - are a form of investment. As such, they are held within stocks and shares ISAs. However, they are low-risk and their returns are designed to track UK interest rates. They serve a very similar purpose, therefore, to a traditional savings account.
- More on Cash and money market funds
The Fidelity Cash Fund is our best-selling fund this year. It is rated 1 out of 7 for risk and aims to track the SONIA interest rate benchmark. SONIA reflects the rate that banks pay to borrow sterling overnight from other financial institutions, and currently sits at around 4.2%. Please note this yield is not guaranteed. The Royal London Short Term Money Market Fund and the Legal & General Cash Trust are also favourites among our ISA and SIPP customers.
Money market funds invest in different forms of short-term debt, including government bonds and certificates of deposit (a type of savings account that pays a fixed interest rate). Crucially, the holdings are very high quality, liquid, and diversified. This means the funds themselves are low-risk and stable.
There are still risks involved, however. A money market fund is an investment, so could go down in value - even if the chances of this are slim. There are also different flavours of fund available. A short-term money market fund is typically lower risk than a standard money market fund, for example.
- More on Cash and cash-like funds
Key features of cash funds
- Diversified, low risk investments: they invest in a wide range of cash-like assets such as high quality bonds and short term loans. They are slightly higher risk than a traditional savings account as - unlike a bank deposit - the principal invested can fluctuate.
- Simple way to track interest rates: cash funds can increase their income quickly when interest rates rise. They may also fall more slowly when rates are cut. Over time, yields tend to broadly reflect market conditions. Unlike a savings account, however, these funds don’t pay an advertised rate of interest.
- Easy to access: it takes up to seven working days to access your money, depending on the fund you've invested in.
- Tax-free returns: if you hold a cash fund in your ISA and SIPP, any returns are tax free.
Will cash ISAs definitely be cut?
Nothing has been confirmed yet, but Reeves is expected to announce a change in her Autumn Budget on 26 November.
There are several stakeholders to consult. Cash ISAs are an important source of funding for bank and building societies, for example, which use the deposits to fund mortgages and other loans.
Substantially reducing the role of Cash ISAs would have knock-on impacts on the price and availability of these loans if providers had to replace the funds from other sources,” the Building Societies Association warned this year.
- Read more from Tom Stevenson: Cash ISAs: the real challenge for savers
- Open a Fidelity Stocks and Shares ISA
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Before investing into a fund, please read the relevant key information document which contains important information about the fund. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. An investment in a money market fund is different from an investment in deposits, as the principal invested in an money market fund is capable of fluctuation. Fidelity’s money market funds do not rely on external support for guaranteeing the liquidity of the money market funds or stabilising the NAV per unit or share. An investment in a money market fund is not guaranteed. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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