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.
Savers face some big changes next year. In a push to get Britain investing, the government plans to reduce the cash ISA allowance for most adults - and could tweak investment ISAs too.
The details are subject to change, as the Treasury is still in discussions with the wider industry. The government made an initial announcement late last year which indicated the types of change we might see.
The headlines
- The cash ISA limit likely to fall to £12,000 for under-65s
- Cash held in stocks and shares ISAs could be restricted or charged
- Lifetime ISAs are due to be phased out
How are cash ISAs changing?
A cash ISA is a savings account where any interest you earn is free from income tax. You can currently contribute up to £20,000 each tax year.
Possibly as soon as from 6 April 2027, however, the annual cash ISA allowance for people under 65 will fall to £12,000. The allowance for savers aged 65 and over will remain at £20,000, meaning they will not be affected by the reforms.
The lower limit will apply only to new contributions. Any money already held in a cash ISA will still be sheltered from tax.
To prevent people getting around the new rules, under-65s will not be able to transfer money from a stocks and shares ISA - or an Innovative Finance ISA - into a cash ISA. We are waiting for clarity on how the measures will work for people who turn 65 halfway through a tax year.
The change is part of a wider package of measures aimed at encouraging retail investment. Other initiatives include a review of investment risk warnings, the introduction of targeted support and a public education campaign on the benefits of investing.
Are investment ISAs changing too?
While the cash ISA allowance is being cut for under-65s, the overall ISA allowance will remain at £20,000. This means anyone can keep adding up to £20,000 a year into their stocks and shares ISA.
However, the government is weighing up some other changes. Firstly, it is considering whether to impose a charge on the interest paid on uninvested cash held in stocks and shares ISAs.
It has also warned that some funds may be too ‘cash like’ to live in investment ISAs. Details have yet to be announced, but it could mean that money market funds - and similar low risk investments - will be restricted in some way.
For now, no changes have been confirmed.
Money market funds - also known as cash funds - act a bit like variable-rate savings accounts. They are very low risk and aim to track UK interest rates. They do this by investing your money in things like government debt and bonds from reputable companies. Savers’ money is pooled with other investors and used to purchase these assets in the pursuit of growth.
- Read more: The basics of cash ISAs vs cash funds
Crucially, these investments are very high quality, liquid, and diversified. This means the funds themselves are low-risk and stable. However, they are still a type of investment, meaning you currently hold them within stocks and shares ISAs.
Have LISAs been scrapped?
No immediate changes to Lifetime ISAs (LISAs) have been announced. However, these accounts are due to be phased out over time. The government plans to consult on a new scheme for first time buyers that will eventually replace them. In the meantime, it is still possible to open a LISA and existing account holders can save into them “in line with the existing rules indefinitely”.
LISAs allow adults aged between 18 and 50 to deposit £4,000 a year. The government will add a 25% bonus to those savings, up to a maximum of £1,000 per year. The money can be used either to buy a first home or after the age of 60. It can also be accessed without penalty if you are terminally ill. Withdrawals for any other reason are normally subject to a 25% charge.
If you’ve got a burning question you want to ask, why not drop us a line? Ask us your question.
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. 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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