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 has paused plans to reform cash ISAs, after a backlash from savers and building societies. Her desire to move us out of cash and into the stock market shows no sign of abating, however.
People who like the low-risk, predictable 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, according to newspaper reports, Reeves wants 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.
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 Treasury bills and certificates of deposit. 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
Will cash ISAs definitely be cut?
Nothing has been confirmed yet, and Reeves appears to have paused her plans for now. There are certainly a number of 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.
The impact of ISA changes on the property market will be a key concern going forward. In June, house prices experienced their biggest monthly fall in two years, according to Nationwide data, which was blamed on weaker demand following the stamp duty increase.
There are certainly a number of 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.
The impact of ISA changes on the property market will be a key concern going forward. In June, house prices experienced their biggest monthly fall in two years, according to Nationwide data, which was blamed on weaker demand following the stamp duty increase.
- 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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