Unanswered questions on ISA transfer and platforms’ cash interest rates threaten to undermine the government's decision to cut cash ISA limits, according to Bestinvest managing director Jason Hollands.
In yesterday’s Budget, chancellor Rachel Reeves confirmed that the annual tax-free cash ISA limit will fall from £20,000 to £12,000 from April 2027. Over-65s remain exempt and can continue saving the full £20,000 in cash.
Before the cut takes effect, savers can shelter £40,000 across the current and next tax year ahead of the 2% increase in savings tax.
Hollands acknowledges the policy could have been worse but identifies serious implementation gaps: “The move to limit cash ISAs isn’t ideal as it reduces flexibility and it is unlikely to drive more people to become investors, but frankly it could have been worse.”
Current flexible ISA rules create an immediate loophole, as it is possible to transfer a stocks & shares ISA into a cash ISA and vice versa.
“Without a change to restrict this in some way or even stop it altogether, there would be nothing to stop someone opening a £12,000 cash ISA and up to £8,000 in a stocks & shares ISA on top, only to then transfer the latter into a cash ISA shortly after,” Hollands explains.
A second arbitrage route exists through investment platform cash facilities. Savers with more than £12,000 could open a stocks & shares ISA with the excess and simply park the money in cash rather than invest it.
For example, Bestinvest currently pays 3.23% on uninvested cash held within ISA accounts. Platform cash rates improved substantially after the Financial Conduct Authority (FCA) wrote to providers in December 2023 expressing concerns about low rates.
The regulatory response remains unclear. “The devil is always in the detail and it remains to be seen whether the ISA rules will be changed to tighten up the rules which will be seen as loopholes,” Hollands said.
Potential fixes include time-limiting cash holdings within stocks & shares ISAs or restricting transfers from investment ISAs into cash ISAs.
Junior ISAs escaped reform entirely despite most contributions going into cash rather than investments. Given their 18-year lock-in period, Hollands argues they represent a missed opportunity for behaviour change.
“The chancellor says she wants more people to benefit from investing: a good place to have started would therefore have been driving these accounts towards investing rather than cash,” he said.
“After all, if young people can see the benefits of investing at the start of their adult lives, wouldn’t that be a great thing for changing behaviour?”