Rachel Reeves’ reported plan to scrap or scale down cash ISAs and redirect them to stocks and shares ISAs may run into issues as they hold large reserves of cash anyway.
Some stocks and shares ISA savers hold 50% of their investment account in cash and not shares, according to investment experts who spoke exclusively to the Express.
Stocks and shares ISAs allow savers to invest £20,000 a year tax free in stockmarket linked assets, including shares and funds, which are collective baskets of shares.
They are considered a more risky alternative to cash ISAs, but there are concerns that many savers are choosing their stocks and shares ISA to invest in cash, with some savers holding 50% of their share ISA in cash-based assets, such as bonds.
James Norton, head of retirement and investments at Vanguard Europe, said: “Amid the ongoing cash savings debate one point that is being overlooked is that people are using stocks and shares ISAs to hold cash.
“Vanguard analysed the portfolios of around 500 UKPI investors finding that a quarter (25%) were holding more than 5% of their Stocks and Shares ISA in cash. Of those, one-third held at least 50% in cash.”
The issue with holding so much cash means investors may be missing out on stockmarket returns, he claimed.
Mr Norton said: “We know that over the long-term stock market performance outstripped cash returns. For example, assuming an investment return of 6% a year after fees for 20 years, a £20,000 ISA would grow to just over £64,000.
“However, if just one quarter of the ISA was held in cash earning 2% interest (a reasonable long-term rate), this would reduce the return by over 20% to around £53,000.
“Here lies the challenge in holding cash, long-term, in an investment account.
“Cash is a drag on investment returns and savers run the risk of falling short of long-term goals if they keep savings – put in an investment product to grow wealth – in cash.”
Ross Lacey, director and independent financial Adviser at Fairview Financial Management, said that with so much cash being held in stocks and shares ISA, the government may even look to police the amount of cash held stocks and shares ISA.
“There will very often be some money held in cash within a stocks and shares ISA.
“This could be to cover any ongoing fees and charges, but also some investment managers will strategically hold cash which can be used to buy into investments when they feel the price has fallen to a more attractive level.
“There are also those who may have transferred a cash ISA into a stock and shares ISA, and not want to gradually phase this cash into the market, which means they’ll hold a higher than average cash balance.
“Should the rumours be true around the Chancellor reducing the allowance for cash ISAs, it’ll be interesting to see how this is policed given there’s not currently any mechanism to limit how much of a stocks and shares ISA is held as pure cash.”
The Daily Express asked the Treasury if it was looking to cut the cash holdings of stocks and shares ISAs.
Chancellor of the Exchequer Rachel Reeves said: “It’s really important that we support people to save, to achieve their aspirations.
“At the moment, there is a £20,000 limit on what you can put into either cash or equities, but we want to get that balance right.
“I do want to create a more of a culture in the UK of retail investing, like what you have in the United States to earn better returns to savers and to support the ambition to grow the economy, creating good jobs right across the UK.”
