With talk about US trade tariffs dominating the news agenda, fresh news on the future of the Cash ISA has gone under the radar in recent days.
Whatever form they take, changes are almost certainly coming down the track, as new comments from the UK Chancellor Rachel Reeves suggest. And I think it could provide an opportunity for Britons to make significantly better returns over the long term.
Change is in the air
On Wednesday (2 April), Reeves affirmed her commitment to a shake-up of current ISA rules during discussions with the House of Commons’ Treasury Committee.
While Reeves said she recognises “the importance of cash for a lot of people“, she added that “I think reform would be worthwhile and that’s what we’re looking at at the moment“.
The Chancellor has spoken previously of boosting Britons’ appetite for investing in shares, giving the economy a boost while simultaneously providing individuals with a better return on their money.
While describing the tax benefits of the Cash ISA, Reeves added yesterday that “I do want to look at the balance [between saving and investing], because I think sometimes it’s a disservice to people saving“. She noted that when factoring in inflation, cash savers have in recent years experienced “erosion in the value of [their] savings in real terms“.
Best of both worlds
I hold a Cash ISA myself, so I’m hoping Chancellor Reeves resists radical changes to current rules. But then I also buy UK and overseas shares and other assets with a Stocks and Shares ISA and a Self-Invested Personal Pension (SIPP), so I can understand the logic behind her plans.
Just a quarter of people in the UK currently own shares versus around 60% in the US. As a result, millions of Brits are missing an opportunity to build a healthy nest egg for their retirements.
Let’s say someone invests £400 a month in a Cash ISA for 25 years. If they manage to secure a 4% interest rate over the period, they’d have £205,651 to show for it by the end.
Now let’s consider if they put £300 in a Stocks and Shares ISA and £100 in that Cash ISA instead. If they achieved a realistic average annual return of 8% on their share investments, they’d be sitting on a superior £336,720 across both ISAs.
Stock markets often experience periods of volatility, the kind of which we’re currently seeing. But over time, they’ve proven an excellent way for investors to build wealth.
Reducing risk
While buying shares is riskier than holding cash, individuals can reduce this by investing in trust and funds (I own several in my own portfolio).
Take the iShares FTSE 250 ETF (LSE:MIDD). This exchange-traded fund (ETF) spreads investors’ capital across hundreds of UK mid-cap shares like Direct Line, ITV, and Currys.
This in turn can substantially reduce the impact of company- and/or industry-specific problems on an investor’s overall returns.
Over the last 21 years, this FTSE 250 has delivered an average annual return of 8%. Its focus on UK shares means it offers less diversification that more global funds. But I still think it would be worth a close look today.
While I believe cash plays a vital role in any portfolio, I believe riskier assets like shares, trusts, and funds should also be considered as part of any retirement savings plan.
