This is the last tax year in which you will be able to keep the full £20,000 allowance in cash. From April 2027, you will be limited to £12,000 in cash and the remainder will need to go into stock or bond market investments. The Chancellor is also set to rule out some of the potential work-arounds, such as using money market funds. Investors will need a new plan for at least some of their ISA savings.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
The hidden cost of staying in cash
There is an argument that holding significant amounts of your ISA in cash is not a great idea anyway. Most wealth managers suggest keeping three to six months’ worth of expenses in cash in case of emergencies. The remainder should be in areas that could potentially earn a higher return.
Cash may feel intuitively safe, but its long-term returns are far below that of either fixed income or the stock market. That means investors’ capital will not grow as fast, and may not even beat inflation.
Over the past 20 years, inflation has averaged 2.85% per year*. That means a £10,000 portfolio would need to grow to £17,609 just to be able to buy the same amount of stuff*. Cash savings may not be growing at all in real terms.
By contrast, bonds have historically delivered higher returns than cash over the long term, while typically experiencing lower volatility than equities. Over the past 20 years, global bonds have delivered returns of around 4% (the annualised return of the Bloomberg Global Aggregate index)**, sitting between cash savings and equities on the risk/return spectrum. This can make them a useful stepping stone for investors who are not yet comfortable taking full stock market risk.
The opportunity cost of remaining entirely in cash can be significant over time. Over 20 years, a £10,000 investment growing at 3% would increase to £18,210, while the same amount growing at 4% would grow to £21,911.By comparison, £10,000 growing at 9% (the long-term average of the MSCI World index since launch***) would grow to £60,090.
That said, moving from cash to an all-singing, all-dancing stock market fund in a single leap may feel uncomfortable for many investors, particularly those who are cautious about taking on too much risk too quickly. For investors reluctant to lose the security and stability associated with Cash ISAs, bond funds can offer a useful middle ground.
Building a bridge from cash to investments
BlackRock Corporate Bond might fit the bill. The fund has been run by Ben Edwards since 2012 and has delivered a steady return with around half the volatility of a standard stock market fund. It has an historic yield of over 5%**, which helps iron out some of the bumpiness for investors. Edwards aims to exploit some of the inefficiencies in bond markets, and is careful with the risks he takes. This means it could be a good choice for nervous investors.
TwentyFour Corporate Bond is another option. Run by a specialist fixed income boutique and with the careful stewardship of experienced manager Chris Bowie, the fund has delivered solid returns. Its income is lower than the BlackRock fund, at 3.4%**, but its long-term capital performance has been a little stronger at 29% over the past 10 years, compared with 26% for the BlackRock fund****.
For something a little more exotic, investors could consider the M&G Emerging Markets Bond fund. This fund invests in government and corporate bonds from developing countries such as Mexico, Brazil or South Africa. This may sound higher risk, but many emerging markets have lower national debt than their developed market equivalents and are running more orthodox economic policy^.
Manager Charles de Quinsonas says: “Improving policy credibility, fiscal discipline and market depth have helped transform emerging market debt into a stable asset class, now trading at a similar volatility to that of developed markets. This is particularly relevant at a time when US exceptionalism is beginning to be challenged, while other developed markets are also facing political difficulties and deteriorating fiscal conditions – a trend that is not likely to be resolved in the immediate future.” The fund has an attractive yield, at 7.2%** and provides something different.
Take a cautious step into equities
Stock market investing is always likely to be a bouncier ride, but there are certain sectors with predictable demand and stable cash flows that are likely to be less volatile.
For investors just dipping their toe in the stock market, M&G Global Dividend might be one to consider. Manager Stuart Rhodes focuses on stable companies that can grow their dividends over time. While it may lag in strongly rising markets, it has defended capital well in tougher periods, delivering positive returns in nine of the past ten years, including a 4.6% gain in 2022 when most markets fell^^.
Ultimately, the Chancellor may have done investors a favour, even if it doesn’t feel like it. By drawing them away from ‘safe’ cash savings, they may be able to build a larger pot over the long term.
