In a significant shift for UK savers, Chancellor Rachel Reeves has announced a major reduction to the annual tax-free cash ISA allowance. The limit will be cut from £20,000 to £12,000, a change set to take effect from April 2027.
Budget Changes Aim to Encourage Investment
The move, unveiled in the recent budget, is designed to incentivise more people to invest their money rather than leaving it in cash savings. The Labour government hopes this will help to boost economic growth. Notably, the new £12,000 cap will not apply to over-65s, who will be permitted to retain the higher £20,000 limit for their cash ISAs.
While some financial experts have warned the cut could deter saving altogether, fresh analysis suggests it could create a substantial long-term benefit for those willing to adapt their strategy.
The Potential £300,000 Advantage
Wealth management firm Murphy Wealth has conducted a detailed study on the impact. Their analysis shows that savers who continue to use their full £20,000 annual ISA allowance—but split it under the new rules—could be significantly better off.
Under the coming regime, an individual could place £12,000 into a cash ISA and invest the remaining £8,000 into a stocks and shares ISA. Murphy Wealth projects that, over a 20-year period, this split approach could yield a pot worth £942,061.23.
This compares to a projected total of £640,867.20 for someone who places their entire £20,000 allowance into cash ISAs each year. The potential difference is a staggering £301,194.03 in favour of the mixed approach.
Understanding the Long-Term Growth
The firm's calculations are based on the historical performance of the MSCI All Country World Index, which has delivered average annual returns of 10.82% since 1988. The most aggressive strategy, investing the full £20,000 allowance into stocks and shares each year, could theoretically generate a sum of £1,393,933.13 over two decades.
Adrian Murphy, chief executive of Murphy Wealth, commented on the findings. "The UK is a nation of cash savers, so a lot of people will understandably see the £12,000 limit on cash ISA contributions as a negative," he said.
"But, if they continue to maximise the allowance and use the remaining £8,000 to invest, they could end up a lot better off for it." Mr Murphy highlighted that 94% of the UK's ISA millionaires built their wealth through stocks and shares accounts, with none achieving that milestone through cash savings alone.
He acknowledged the perceived risks, stating: "Many people see investing as risky. While stocks and shares can be volatile, and there is no such thing as a guaranteed return, it's also worth remembering that investing has tended to provide higher returns over the long term."
The analysis underscores a clear message for UK savers: adapting to the new ISA rules by diversifying into investments could unlock far greater financial rewards in the future.
