‘I lost £5k playing the stock market – cutting the cash ISA limit won’t make me invest’

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Stephen Charles, 74, doesn’t know exactly what he invested in 10 or so years ago. A retired secondary school English teacher from Forest Gate, east London, his speciality is Shakespeare not stocks. He went to a financial adviser with “quite a lot of money” seeking to make it grow – instead, over a number of years, he lost £5,000.

“We were told this portfolio was fairly safe. We were going for safe options,” Stephen recalled. “It was a shame we didn’t just save that money in a cash ISA or regular savings account, it might have given us a higher return.”

Like 14.4 million Brits (according to analysis this year by investing platform AJ Bell) he’d only put money into cash ISAs, rather than a stocks and shares ISA, before his unsuccessful dabble in the stock market. Now a cash ISA from Coventry Building Society – which he says offers “really good customer service” – is the only place he puts spare money.

All ISAs allow money in them to grow via interest or investment returns entirely free of capital gains tax, dividend tax or income tax. Low risk, high control and very easy to use, cash ISAs are appealing to those who want to hold money in cash, rather than invest.

“After our losses, we’re reluctant to get involved with stocks and shares again,” Stephen said. Behavioural finance terms it a bias towards safety. “If you need to withdraw money from a cash ISA, it is easy to do so at any time,” he added. “And of course it’s easy to put money in.”

This last part may soon become less true. There’s currently an overall £20,000 ISA limit, but for months, it’s been rumoured chancellor Rachel Reeves wants to slash the cash ISA limit to potentially as low as £4,000 in the Autumn Budget on 26 November. Savers like Stephen could find they have fewer options to generate tax-free, risk-free returns.

Saving versus investing

With his wife, also a retired teacher, Stephen tucks away several hundred pounds a month in cash ISAs and has done so every year since Labour chancellor Gordon Brown introduced Individual Savings Accounts for cash and shares in April 1999 to replace PEPs and TESSAs.

Statistically, the couple could have made more investing. A one-off £1,000 when ISAs launched would now be worth £5,000 in the global funds sector, while £1,000 annually in the same could have grown to £92,000, number crunching by AJ Bell found.

The same one-off payment into a cash ISA in 1999 would be worth £2,079 today, while £1,000 annually in cash would have grown to £36,290.

Laura Suter, director of personal finance at AJ Bell, said: “These figures highlight the hidden cost of playing it safe. While keeping money in cash can feel comfortable, over time it’s an almost guaranteed way to lose purchasing power. Inflation quietly eats away at savings, and even the average cash ISA will have struggled to keep pace.”

Stephen understands higher returns are possible if you risk your money a bit. “I get that’s true,” he said. “But our experience is you can also lose money. And that makes us wary.”

Figures suggest his reluctance is representative of most UK savers. HMRC data shows 22.3 million adults hold an ISA but two thirds (66%) of all ISA subscriptions in 2023/24 were into cash. Only around 3.6 million people hold both investment and cash accounts. Just 4.2 million use ISAs solely to invest.

Reeves’ plan to cut cash ISA limits

Some in financial services and, reportedly, the Treasury, see the popularity of cash ISAs as a problem. Current Labour chancellor Rachel Reeves seemingly wants the self-confessedly “risk averse” Charles’ and millions like them to switch to investment.

Reeves’ rumoured plan? Cut the cash amount savers can put into an ISA – potentially from £20,000 to £10,000 or even less – in a bid to get more people investing in British companies to boost their own nest eggs and UK economic growth. No thanks, said Stephen.

“We wouldn’t do that. We wouldn’t start saving into a stocks and shares ISA rather than the cash ISA. And if we reach the cash ISA limit, we’d probably look for other means of saving,” he said.

Savings interest on money held outside an ISA, however, is liable for tax after you reach your personal savings allowance – £1,000 a year for a basic rate taxpayer and £500 for a higher rate payer. Additional rate taxpayers have zero allowance.

Like many savers, the couple feel they don’t know enough about investing. Their final salary Teachers’ Pensions scheme meant they retired at 60 having never needed to worry about how their retirement savings were invested, unlike those with modern defined contribution pension pots. “We’re no experts,” Stephen said.

Leeds Reforms

The government has a plan for this too. Under the Leeds Reforms “working people will be equipped with the support they need to invest and grow their savings”, it was announced in July.

Banks will be tasked with sending investment opportunities to savers with cash sitting in low-interest accounts for the first time. Major financial institutions are backing an advertising campaign that will highlight the opportunities of investing for people who are able to do so.

Under current trends, moving £2,000 from these low-interest accounts to stocks and shares could make millions of people more than £9,000 better off in 20 years’ time, by the government’s reckoning.

However a nationwide survey of 1,000 cash ISA holders by savings app Moneybox found 87% need a significant savings buffer to feel comfortable investing – with an average threshold of £27,617.

Almost nine out of 10 (88%) of those polled are calling on the government to protect the cash ISA tax-free savings allowance in the upcoming Budget. Just 9% said cutting it would prompt them to start investing more.

Cecilia Mourain, chief savings officer at Moneybox, said: “Millions of people rely on the cash ISA to build their financial future and any changes should be carefully considered.

“A strong cash foundation enables households to weather shocks and pursue long-term goals, from homeownership to retirement.”

Cash saving at risk

Critics say cash ISA money is essentially languishing virtually dormant and should be put to work in the investment markets.

Building societies – which use cash ISA holdings to lend out to mortgage borrowers – dispute this. They also argue the simplicity of the ISA is one of its greatest strengths – savers can put in up to £20,000 every year, switch between the stock market or cash, or have a mix of the two.

Jeremy Cox, head of strategy at Coventry Building Society, said: “Upsetting this balance by reducing the cash ISA allowance is going to make it far more complex in one fell swoop.

“In nudging people toward investing more, the chancellor needs to be careful she doesn’t throw the baby out with the bathwater and discourage people from building up their cash savings too.”

Stephen agreed: “I guess I’m quite old fashioned, I inherited habits from my parents of saving rather than spending. But I think we’re probably quite typical of a certain type of saver. And I’m just not sure it’s particularly appealing for us to invest in stocks and shares.

“I think saving should be encouraged by the government, rather than going down the route of trying to take more risk with our money.”

Overcoming this quiet British resistance multiplied by millions of risk averse Stephens could develop into (another) Budget headache for the chancellor.

MoneyWeek has contacted the Treasury for comment.