146- What's Changing With ISAs?

In April 2027, the amount you can subscribe to Cash ISAs is likely to change. 

In this episode, Benjamin summarises the key points you need to be aware of and ultimately why these changes are unlikely to have any material impact on your long-term financial plan. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:09

Hello money nerds, welcome to Heads Up on Money. It's episode 146, and this week we're talking about the humble ISA. Specifically, we're talking about the changes that are due to come in next April, April 2027, the changes outlined by the current Chancellor Rachel Reeves, and how the ISA limits that we've all come to know and love £20,000 is changing slightly. It's perhaps not as material as you may have thought it was, but I'm going to go into everything you need to know and do in this week's episode. So if you are enjoying Heads Up on Money and you are getting any kind of value from my ramblings every Friday, please do all the great stuff. Like, subscribe, comment if you're listening on Apple Podcasts, and just share this with your loved ones. As I say every week, the more people that understand this stuff, the better. Money and personal finance needn't be as confusing and overwhelming as it is made to appear. That's what Heads Up on Money is all about. So getting into this one, we're going to try and keep it as short and sweet as possible. So we're talking about the ISA. Reminder point number one. Confusion point that most people have around ISAs and pensions by extension is people say, My ISA's not doing very well. I'm not getting much from my ISA this year. I'm not getting much from my pension this year. An ISA and a pension is just what's called a tax wrapper. If I can bring this to life through a maybe more clear metaphor, is the idea of your ISA being this box, and a pension being a separate box, and the box has certain tax rules, certain tax privileges that may mean income tax, capital gains tax, inheritance taxes are treated different ways within each of the boxes. And an ISA and a pension are different boxes but different rules. There are other products such as general investment accounts, investment bonds, offshore bonds, onshore bonds. I'm going to do some episodes on those wrappers of the podcast very soon, but they all just have different rules of the game. And what goes into each of the boxes is not the product itself, it's not an ISA, it's not a pension, it's the underlying assets that you're invested in. And typically these will be in the form of cash, property, bonds, or equities, and as I've talked about in numerous episodes of the podcast and have bored you senseless with if you're looking to achieve long-term capital growth with your wealth, you need to be investing in real asset classes that offset the terminator of wealth at inflation, and that of course is equities and in some cases your property. Cash in the bank or bonds are not going to win out against inflation over the long term. Now, where this relates to ISAs is when we have ISAs, there are normally, let's keep this as plain and simple as I can. There are typically two different flavours of ISAs. Now there are other flavors, some of which, such as lifetime ISAs, innovative finance isas, but let's park those for now. Let's keep it to the two main ones. We've got cash ISAs and stocks and shares ISAs. As the name suggests, cash ISAs, the underlying asset class is cash. The returns you get will be interest. There will be no capital growth in the value of your capital within that ISA. Critical point with cash. There's no change to the underlying value. You've got a grand and a cash ISA today. In a year's time, you've still got a grand, you've had some interest added, but you've still got a grand, and the rampant force that is inflation will have eroded the real value of that cash ISA. On the other side of the fence, we've got stocks and shares ISAs, whereby you invest in underlying investments, assets that deliver the potential for long-term capital growth. And again, you can blend that between equities and bonds depending on your risk preferences and what you're comfortable with. But as a reminder, folks, volatility in the stock market is a feature of investing, not a flaw. And once you've done all the good stuff around ensuring you have a suitable level of cash to cover emergencies and any unforeseen events, a nice buffer in there. You've covered retirement income for a couple of years. Once you've ticked off all that boring stuff, you've got good levels of protection in place that covers you in the event of illness or death. All the fun stuff has been thought about. The remainder of your wealth should be invested in equities. You should be offsetting the terminator of wealth that is inflation because any volatility that happens, which is natural, is immaterial to the short-term nature of your financial plan. Investing is a long-term game. Saving is short term, investing is long-term. Right, climbing down off my soapbox. Relating this back to ISAs. We've got cash ISAs, we've got stocks and shares ISAs. Now, for many years now, the annual ISA limit has been £20,000. So in any one tax year, which runs from April to April, you can park £20,000 in an ISA. Again, keeping this simple, we're not talking about junior ISAs, we're talking about adults, cash, ISA, stocks and shares ISAs, you can put in 20 grand a year. And the good planning that couples do is using both of your ISA allowances to the fullest extent. You may use pensions as well because pensions receive tax relief when you pay into them, whereas when you pay into an ISA, you don't get any tax relief at the outset. But going forward, there's a greater parity between pensions and ISAs. Other than the input being different to a pension, as I said, you get tax relief. But once the money gets into a pension or into an ISA, they're exempt from income tax, capital gains tax, and with effect from next April, they're both considered to be within the net of inheritance tax. Now that's different at the moment at the time of recording because pensions are still considered inheritance tax exempt vehicles typically, but that is of course changing next year. I've done previous episodes of the podcast on that. But when we look at the ISA wrapper, the humble ISA, why people put money into an ISA is so that any income or capital that occurs within that ISA is not subject to tax. Because any amounts we hold out with the ISA product could potentially be subject to income tax or capital gains tax, depending on how we hold that investment or the nature of the investment, be it cash or stocks and shares. So holding money within the ISA is an absolute no-brainer. If you've got the affordability and the wealth to do so, you should strongly be considering using your ISA allowance every tax year. Now, what's changing here, as I've said, is we've become accustomed to this annual allowance being £20,000. Now, Rachel Reeves brought in a forecasted change that's due to come into effect next April, April 2027, where the total amount you can pay into ISAs is not changing. You can still use £20,000, but at the moment you've got lots of discretion around that £20,000. You could put £10,000 into a stocks and shares ISA and £10,000 into a cash ISA, or you could go £15,000 into a cash ISA, five grand into a stocks and shares ISA. You've got flexibility there as to how you split your ISA allowance. As a side point, as I've alluded to in previous episodes of the podcast, cash ISAs they're fairly redundant, to be honest with you. Now the reason for that is unless you are holding significant wealth in cash, you're unlikely to be attracting too much in the way of ongoing tax anyway, because we've got things like your starting rate banned for savings, your personal savings allowance. That means even wealth that is not sheltered in an ISA can still have exemptions from interest or income tax. Whereas wrapping it in a cash ISA, you're almost wrapping it in a box that doesn't need to be there, if that makes sense. Whereas with the case of stocks and shares, where you're likely to get more in the way of income and income in the form of dividends, not interest, and you're more likely to get capital growth. In fact, you are more likely because, as I said, cash has no capital growth potential. In a stocks and shares ISA, you're invested in investments, they're going to have hopefully long-term capital growth. If you play the game long enough, that will almost be a certainty. And they're exempt from capital gains tax. So using the ISA wrapper, using the ISA box in stocks and shares is hugely, hugely valuable to ensure that you keep more of your returns and less goes to the tax man. But a cash ISA, it seems like a comfort blanket, but in reality, the situation had you not used the ISA wrapper is unlikely to be very different. Of course, it does become different have you got more substantial amounts held in cash. But generally speaking, for most people who, you know, may not perceive themselves to have significant investment wealth, the Cash ISA isn't really doing much for you. Now, against the wider backdrop of this, why Rachel Reeves has brought in some changes is because there's such an apathetic response to investing in the UK. Because we perceive it as high risk. Investing is a bad outcome, saving is a safe, good outcome. But in heads up on money and you money nerds, I have no doubt I've got this drilled into you by now, is we flip the rhetoric on that, and you recognize that the greater risk to your financial plan, that the greater risk to you achieving your long-term financial goals is through not investing. Not not investing, if that makes sense. It's not allocating enough of your wealth to investments and instead prioritizing saving that is going to be the more danger impact to your financial plan and ultimately the ability to whether or not you can or cannot meet your financial goals. So the government recognized this, that in the UK we are very against investing. And again, there's a whole kind of thing here going on with the UK being an unloved stock market. The government are trying to encourage companies to list their shares here. They're doing this partially for their own benefit to try and improve the investment economy in the UK. So basically, without going into the weeds and without being too political and trying to be as impartial and unbiased as I can be, because I'm a financial advisor, I'm not a political advisor. Is the government are doing this basically to encourage people to invest. They're trying to move us away from being cash investors to stocks and shares investors. So on the face of it, it seems like a really good thing. So what is exactly changing? Well, from April 2027, there's a shift in how you are able to use your £20,000 annual ISA allowance. And there's a split depending on whether you are under 65 or over 65. So for most people under 65, you will only be able to use 12,000 pounds of your cash ISA allowance each year. You will still have 20,000 pounds as your overall ISA allowance. That's not changing. But if at the moment you are putting in 20 grand a year to a cash ISA, the limit on the cash flavor of ISAs will be £12,000. So if you wanted to use the full ISA allowance, you could sweep up to £12,000 in a cash ISA, and the remainder £8,000 would have to go to stocks and shares. So again, this is kind of very much targeting people to try and ensure that some of their ISA allowance is being invested in stocks and shares rather than in cash. So it's not a ban on cash savings, it's just rebalancing the incentives that you have available to you. Conversely, if you're over 65, it nothing is changing. You can still put the full 20 grand into a cash ISA if you want to. So they're trying to encourage more younger people to invest. Now, again, uh the the skeptic in me would say that, you know, the money nerds who are listening to this, we recognize that a limit on the cash flavour of our ISA is not really that big a deal. Because we recognize that from a tax perspective, the cash ISA isn't all that lucrative anyway. And from an asset class perspective, investing in cash is not investing at all, it's saving in cash. So if you're under 65, there's now a limit as to how much of your ISA allowance you can put into cash. You've still got 20 grand to play with, the government are just slightly dictating now the maximums with which you can use that to each. For the next 12 months or so leading up to April 2027, you've got full flexibility on how you use that allowance, whereas going forward you wouldn't have. And one of the planning things you need to think about here, of course, is there's a restriction going forward between transferring wealth you've got in a stocks and shares ISA into a cash ISA, and it will be subject, of course, to this new annual limit. So at the moment, if you have a stocks and shares ISA and the underlying investments within that stocks and shares ISA are actually cash, and what I mean by that is some people may have what's labelled a stocks and shares ISA, but they may be invested predominantly in cash within that stocks and shares ISA or a money market fund, which is as close to cash as possible with very little volatility. Now, people generally shouldn't be doing that because stocks and shares ISAs could be more expensive than cash ISAs to run. But for people who are holding a stocks and shares ISA that's largely perhaps got cash in it, if you're planning transferring that over to a cash ISA to circumvent the £12,000 allowance, then that's not going to be possible. So it's just a loophole that the government have addressed and attempting to close to ensure that you don't pay 20 grand into a inverted, commas stocks and shares ISA, but are actually retaining cash as the asset class within that stocks and shares ISA, and you then transfer it over to a cash ISA and you think you've circumvented the 12 grand ceiling, you've managed to put in 20 grand, you're not able to do that. So that's just one thing to point out. But however, generally speaking, it seems like a good thing. It seems like we're encouraging more people to invest, and largely speaking, I am in favour of it. I'm not entirely sure this is going to incentivize people to invest more because the issue is at the education level, is we're not told and educated enough as to the benefits of investing or the dangers of inflation and the terminator of wealth and how that can mean the difference between achieving and failing to achieve our financial plans. So I'm not sure if all of a sudden people who were against investing in the first place are suddenly going to be driven to use some of their ISA allowance to stocks and shares. Again, not too sure about that. The fact that over 65s are able to still use their cash ISA allowance in full, again, nothing's really changing for them. Arguably, it's these individuals typically who are more wealthy that are able to use their ISA allowance in entirety. So have the government actually made the changes at the age category that actually is going to have a material impact, I'm not too sure. Again, many people, cash is not just about returns, it's about psychology. We use cash ISAs for emergency savings, for short-term security, for sleep at night money. That's what cash ISAs are for. My concern is perhaps if you reduce the flexibility, then people may not invest more. They may actually just feel a little bit constrained. And a wider concern I have about this is the beauty of the ISA is that it's a fairly simple investment product. Most people have an ISA in one form or another. Most people know whether you're financially savvy or not, whether you're extending from the financial illiterates to the money nerds who listen to this, even the financial illiterates probably know that you can bung 20 grand into an ISA in any one tax year. The government tampering with that, tampering with what is historically a very simple investment wrapper, maybe isn't going to be too good a thing. I'm not sure. We'll just have to wait and see how this plays out. And of course, how the government polices this, I'm not too sure. How investment platforms will police this, I'm not too sure. We still are awaiting further information on the intricacies of how this works, some of the points I talked about earlier around people circumventing the rules by investing in cash and a stocks and shares ISA. Again, the minutiae, the weeds, they all still have to come to fruition here. But the the key points to make you aware, money nerds, is that over the next 12 months the ISA rules remain as they are. From April next year, there's going to be restrictions on how much you can use of your annual allowance in ISAs to a cash ISA. If you're under 65, the changes will affect you. If you're over 65, they won't affect you. But against the wider backdrop of your financial plan, I would really encourage you not to be too concerned by these changes predominantly for the main reason, as I alluded to, is that if you are investing and if you're financially savvy, then arguably you should be using your stocks and shares ISA allowance in its entirety. Cash ISA allowances and the fact that they're changing is really, by the by, an unlikely to have much of an impact for you. But it's clear the government are recognising that not enough people know this, not enough people are investing, too many people are saving. So the direction of travel is happening, it's a good thing on the whole, but we'll just have to wait and see how this plays out over the next 12 months and how the actual intricacies and logistics of how it operates in practice are going to come to fruition. There we are, money nerds. I bet you didn't think I could talk for 20 minutes about the humble cash ISA, or maybe you did, because you know that I often get with my soapbox and take this episode of the podcast into routes that I probably didn't plan to go down, but that's what happens when you park a microphone in front of me each Friday. But I hope you found it helpful. I hope it's given you some peace of mind to know that probably what you're reading in the Daily Mail or the Daily Star saying ISA allowance slashed and major changes to ISAs, you're going to pay more tax, all of this stuff, scaremongering, doomsday planning, it's really not that big a deal. So there we go. I'm going to wrap it up there. If you've enjoyed this, as always, do share it with your loved ones. I'm sure there's lots of people need to know this riveting content, and it really will undoubtedly brighten their weekend. But I thank you as always. Genuinely, the fact that you tune in every Friday means a huge amount to me. I love getting some comments when people tell me they're enjoying the podcast or send me some messages. Again, my contact details are in the show notes. If you want to ping me an email, I really do love to hear from you. And if there's anything you want me to cover in future episodes of the podcast, that is also how you can reach me. But I'm going to wrap it up there. Stay safe out there, money nerds. I'll see you next Friday when we do it all over again. Personal finance never sleeps. Have a great weekend. Bye for now.