Cash ISAs are facing potential "danger" in terms of reduced tax-free limits and lower long-term purchasing power due to inflation, rather than immediate safety risks. The government is considering curbing the annual £20,000 cash ISA allowance to encourage investment in stocks and shares. While savings remain secure up to £85,000 under the FSCS, inflation can erode the real value of cash over time.
Let's cover what's changing. For anyone under the age of 65 they will be limited to putting £12,000 into their Cash ISA from April 2027. They will still have the full £20,000 annual ISA allowance overall, so they can put the remaining £8,000 into their investment ISA – or just not use it, if they're that way inclined.
Cash ISAs - risk-free, tax-free savings. Use a standard savings account, and if you've large amounts of savings, you may have to pay tax on the interest if you go over your personal savings allowance (£1,000 in interest for basic-rate taxpayers, £500 for higher-rate).
If you're not paying tax on your savings interest, cash ISAs have no benefit – so many should ditch them for higher-paying standard accounts. That's the message from MoneySavingExpert.com founder Martin Lewis in the third episode of the latest series of ITV's The Martin Lewis Money Show Live.
The FSCS protects up to £85,000 per person, per firm, if a financial services company were to fail (whether that's because it's become insolvent, gone into administration or any other reason). It's like a safety net in the unlikely event of a firm collapse.
For short-term goals such as an emergency fund or a holiday, ISAs and savings accounts can still be a good place to save up. For long-term savings such as retirement, however, you should consider investing to help your money grow over time.
ISA insights: guides, investment ideas and tax tips
While you won't physically lose any of your money if you keep it in cash, its spending power will be reduced in real terms. The other is that lower returns mean you may struggle to get the growth that you need to achieve your long-term financial goals.
You can get around 7% interest on savings in the UK primarily through Regular Saver accounts, with top offers from Zopa (7.1% variable), First Direct (7% fixed), and the Co-operative Bank (7% variable), though these often require you to have their current account and limit monthly deposits, while Principality Building Society has offered rates near this (7.5%) on fixed-term savers, so check MoneySavingExpert and MoneyWeek for current deals.
There's no limit to how much money can be in an ISA. The ISA allowance limit applies to how much you can pay in during each tax year (6 April to 5 April the following year).
The UK government has announced significant changes to the tax treatment of cash held within stocks and shares Isas, targeting a loophole that could allow savers to bypass newly imposed caps on tax-free cash savings.
The main difference is that a cash ISA is a tax-efficient way to save money. Interest on your savings is paid free from UK income tax and capital gains tax. While both could help your money grow, choosing the right one (or a combination of both) for your circumstances can help maximise your money's growth potential.
Disadvantages: Interest rates may decrease, funds might be locked in fixed-rate ISAs, and not all accounts permit transfers, sometimes incurring exit fees.
Plans by chancellor Rachel Reeves to reduce the amount that savers may put into cash ISAs will upset millions of people but not achieve what she wants, money expert Martin Lewis is warning.
You do not pay tax on: interest on cash in an ISA. income or capital gains from investments in an ISA.
The HMRC document also said there were around 3,080 Isa accounts with a market value of £1 million-plus in 2022/23. It counted 30 cash Isa accounts with £500,000-plus in them and 38,680 stocks and shares accounts containing at least £500,000 in the tax year 2022/23. The figures were rounded to the nearest 10.
Warren Buffett doesn't dislike dividends but believes retaining earnings for reinvestment, acquisitions, and buybacks at Berkshire Hathaway creates more long-term value than paying them out, allowing for greater compounding and growth, though he supports dividends in companies where profits can't be reinvested profitably, like See's Candies. His core principle is that if Berkshire can generate more than $1 of market value for every $1 kept, shareholders are better off with retained earnings, a strategy proven effective by Berkshire's outperformance.
Pensions are particularly beneficial for higher-rate taxpayers who get a higher rate of tax relief on initial contributions. ISAs are much simpler and more flexible, but you are held back by the lower annual investment limit. In practice, a combination of ISAs and pensions will be suitable for most people.
Cash ISAs are useful for:
But there are some downsides worth thinking about: Interest rates are often lower than inflation. Your money isn't compounding in the way investments can. Over time, you may lose out on real buying power.
However, it is unclear whether there will be any changes, and savers will still have time to take action in response to any potential reforms.
While exact numbers vary by survey, roughly 15% to 20% of Americans have $10,000 or more in savings, though many have significantly less, with a median savings balance often reported below $10,000, highlighting a gap in financial security for many households. A significant portion of the population struggles to save, with some surveys showing nearly half having under $500 or less than $1,000, while others indicate that a notable percentage has $10,000 to $49,999.
There are a number of factors you should consider before selecting a cash ISA.