Cash ISAs: the real challenge for savers

The debate about whether Rachel Reeves should or should not limit the amount that people can save into a cash ISA has been heated. A good argument can be made that too much money has sat in low-yielding cash accounts that could be working harder in the stock market. But many people still feel, with some justification, that this is just another raid on prudent people trying to do the right thing.

• Read: How might the government change Cash ISAs?

The problem with this debate is that most people expressing an opinion have a dog in the race. The Chancellor says she wants people to earn more on their savings - of course she does. But she also has her eye on £300bn of idle cash that would provide a useful boost to the growth promise on which she was elected if it were redirected towards UK-listed companies. That cash would also raise a useful amount of fresh revenue if, as is more likely, it simply moves from a tax-free cash account to a taxable one.

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You may not be surprised to learn that banks and building societies view that same money as a funding source for the mortgages and other loans they offer. They, therefore, make the case for precautionary saving, and they highlight the danger of putting money to work in the market that you might need soon to pay for a wedding, school fees or a house move.

It is no surprise that their counterparts in the asset management and investment platform industry (full disclosure: that’s me) prefer to focus on the historical outperformance of stock market investments over cash. We warn that holding too much cash for too long poses a different kind of threat to your financial security.

• Read: What can we expect in the Autumn Budget?

We are all right, of course. There is a place for both cash and investments in our financial lives. The bigger problem is that most people don’t understand financial risk. So, they don’t know how much importance to attach to the arguments on either side of this debate. Or what the right balance of cash and shares should be for them.

Rachel Reeves highlights one risk of holding too much cash. Doing so, usually means you are paying too high a price for certainty. You prefer a return of your money to a return on it. Which is reasonable for some of your savings, but not for all of them.

Everyone should set aside a cash buffer before they start to think about investing in the stock market. But once they have done that, there is no reason to park any more in cash. How big that cushion should be is harder to say - it will vary according to your age, your ability to find new work if you lose your job, and many other factors.

Most people don’t know how much cash they should sensibly hold. Consequently, some will hold too little and others far too much. But there is a long list of other risks over which they don’t have a good grasp either. And, until they do, tweaking contribution limits may make less of a difference than the Chancellor hopes. You can lead a horse to water…

There are a few things we, as an industry, have not done a great job of explaining. The first is the difference between volatility and risk. Volatility is the natural ups and downs of the market. This is only ever a risk if we sell our investments in response to a fall in their value and crystallise the loss. The stock market fell 20% between February and April. But unless you sold at the bottom, you won’t care now because it quickly recovered.

Another point of the cash buffer is to prevent the next risk - being a forced seller. You should always have enough cash in the bank to be able to ignore short term market volatility. Or to actively desire it as a chance to buy assets at a discount to their real value.

Holding that cash is a first step towards avoiding another poorly understood risk - putting our eggs in too few baskets. One of the reasons I have been able to shrug off the market’s change of heart on US assets this year is that America is only a part of my portfolio. Yes, there have been times in the past ten years when I wished it was a bigger part than it was, but broad diversification has felt like a pretty good strategy in the first half of 2025.

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The biggest risk for most people when it comes to investing (or saving, come to that) is to put it off. I often tell a story about two twin sisters, one who starts saving young and one who for too long finds other things to spend her money on. The prudent sister gets to a point in mid-life when she has so much capital that further saving is largely pointless. Her sister, meanwhile, can never catch up, no matter how long she keeps putting money aside. The point rightly made by the pro-investment lobby is that achieving the first sister’s happy state is really only possible by tapping into the stock market’s superior returns.

The final risk that very few people properly understand is the ravage of inflation. Even those of us who think about how much we might need to fund our retirement fall into the trap of thinking about this in today’s money. What we need to understand is that even at the Bank of England’s 2% target for inflation, the pot we manage to accumulate will buy us half as much in 36 years’ time as it does today. At 3% inflation, our purchasing power will halve in just 24 years. This is the strongest argument for shares over cash, which in the long run tends only to match, not beat, inflation.

So, while I support the Chancellor’s desire to get people more focused on their investment returns than the return of their investments, this is just the start of it. Informing people how to save and invest sensibly is more important than bickering over whether they should do so via cash or the stock market.

This article originally appeared in The Telegraph.

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• Read: How to make cash-like returns - without a cash ISA
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• Read: Investors should remember Churchill’s wise words

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. 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.