Fears over threats to tax-free cash in the Budget has “accelerated the unwelcome trend” of investing pensions in cash Isas, warned Steve Webb, a partner at LCP.
Webb’s comments come after AJ Bell pointed out that £3.9bn flowed into tax-efficent accounts in September ahead of the imminent Autumn Budget.
AJ Bell stated there has been a “deluge” of consumer savings flowing into cash Isas, prompted by significantly more attractive interest rates and rising tax liabilities.
Webb said that there has “long been a concern” that people are cashing out their pension pots in order to access their 25 per cent tax-free lump sum and putting the other 75 per cent into low-return investments such as cash Isas and even current accounts.
“Fears over a potential threat to tax-free cash in the Budget seem to have led to an acceleration of this unwelcome trend,” he added.
“As well as losing investment returns on money sitting in cash, savers may also have faced unnecessarily large income tax bills from withdrawing their money in one go.
“The best way to avoid this happening again would be for the chancellor to make a long-term commitment to the stability of the pension tax relief system in her Budget later today”.
Additionally, AJ Bell head of investment analysis, Laith Khalaf, detailed how the trend of cash Isa investment has changed over the years.
“When George Osborne introduced the personal savings allowance back in 2016, it looked like he might have inadvertently killed off the cash Isa,” he explained.
“With a tax-free allowance of £1,000 for basic rate taxpayers and interest rates at close to zero, savers had very little motivation to stash funds in a cash Isa.
“Now cash rates are back to more normal levels and income tax bands have been frozen, the tables have turned.”
He also pointed out that, in the first nine months of this year, £42bn had been saved into cash Isas, an increase on the £36bn which was saved over the same period in 2023.
However, Khalaf was more positive about this trend than Webb, stating: “Savers are dead right to make the most of their available tax shelters seeing as we’re in the middle of a dramatic rise in taxation.
“Conventional financial planning wisdom suggests individuals should have three to six months of expenditure held in cash, just in case.”
However, he acknowledged that there are “questions” over whether consumers are hoarding too much cash and not investing in the stock market, “when prudent financial planning would suggest they should”.
tom.dunstan@ft.com
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