Britons who want to keep their ISA money in a cash version of the account could take advantage of ‘proxy’ versions of the cash ISA if it was scrapped, according to one expert.
If Rachel Reeves goes ahead with plans to either scrap or reduce the tax-free benefits of the cash ISA, millions of savers would, in theory, have to find another home for their cash savings.
During meetings with city executives, the Chancellor is believed to have discussed limiting the cash ISA allowance from £20,000 to £4,000 a year.
There were reports following speculation that Ms Reeves was considering scrapping the cash ISA in a bid to encourage more people to invest in the stocks and shares version of the tax-free savings account.
But Philip Dragoumis, director and owner at Thera Wealth Management said savers who wanted to keep investing their full £20,000 ISA allowance cash could take out a stocks and shares ISA that invests in cash-based assets, a proxy.
He said: “You can easily replicate the cash in a cash ISA with sterling money market funds — funds that hold multiple deposits and very short term gilts in various banks.”
He said, in effect, it would work similar to a proxy, an investment which mimics the behaviour or perfomance of another assets without direct exposure to it.
An example of a proxy might be someone wanting to benefit from the rising price of gold who instead invests in a fund which holds lots of mining companies.
With cash it’s more simpler – asset managers already invest some of the stocks and shares ISA cash in cash-based assets.
Becks Nunn, a personal finance expert at Fidelity International, said: “A cash fund tends to invest in a portfolio of short-term cash deposits, money market instruments and high-quality bonds (to be absolutely sure what assets the cash fund holds, you should always check the fund factsheet).
“It’s designed to provide a high level of stability and liquidity for investors looking for a modest investment return at the lower end of the risk spectrum.”
James Norton, head of retirement and investments at Vanguard Europe, said many people were already using stocks and shares ISAs to hold cash, but were not aware of it.
He said Vanguard analysed the portfolios of around 500 UK investors and found that a quarter were holding more than 5% of their stocks and shares ISA in cash. Of those, one-third held at least 50% in cash.
Mr Norton said: “We know that over the long-term stock market performance outstripped cash returns. For example, assuming an investment return of 6% a year after fees for 20 years, a £20,000 ISA would grow to just over £64,000.
However, if just one quarter of the ISA was held in cash earning 2% interest (a reasonable long-term rate), this would reduce the return by over 20% to around £53,000.
“The adage time in the markets, not market timing, has held for so long because it’s true. So, as you approach tax year-end and top up your ISA, make sure you aren’t eroding your returns or diminishing your likelihood of reaching long-term goals by sitting in too much cash.
“Instead, set yourself up for success by staying the course, because remaining ‘in the market’ tends to reward long-term investors.”
