Rachel Reeves, get your hands off investors’ cash

Source: Trustnet

I am not the biggest proponent of using cash as an asset when it comes to long-term savings. Over time it lags investing in stock markets by such a large amount that it is almost criminal. However, I’m not in favour of disincentivising it completely.

In last year’s Budget, chancellor Rachel Reeves slashed the cash ISA allowance for under 65s from £20,000 to £12,000 (effective from 6 April next year) but she might go even further.

The rumour mill around Westminster this week suggests she is also reportedly planning to introduce a 22% charge on interest earned on cash held within stocks and shares ISAs – effectively aligning with the basic rate of tax on savings – a change that would also come into effect from the next tax year.

But Reeves needs to keep her hands off our cash.

On the face of it, I can understand the policy. Reeves is obviously concerned that her scheme to get more people investing by limiting the cash ISA allowance will falter as people open stocks and shares ISAs and then leave their money in cash.

And it has been done before. Pre-2014 cash in stocks and shares ISAs faced a 20% levy, a system removed by then-chancellor George Osborne.

But perhaps she should have thought of this before she announced the proposal and come up with a more creative solution than taking us back more than a decade?

Even so, it completely misses the point – cash can be a useful investment tool in its own right and taxing it risks taking this option away from people who want or need to use it.

Those who invest understand that holding cash over the long term makes nowhere near the same amount as investing.

What’s more, comparisons between the returns that cash offers versus investing tend only to be centred around the base rate or, even worse, the best savings rates on the market. Platforms historically have paid far less than this on cash sat in stocks and shares ISAs, as Trustnet revealed last year.

People therefore tend to hold cash in investment accounts to lock in returns, prepare for a crash or bridge between positions – not because they're trying to game the system.

And those who open a stocks and shares ISA simply to hold cash are making next to nothing after platform costs, which is rather unappealing.

Even if some people do park cash in stocks and shares ISAs in the short term, they will soon realise it is not worth it. After all, no one wants below-inflation savings rates when, in most cases, savers would make more from the best savings accounts outside of an ISA and paying a bit of tax anyway.

At this point, the chancellor is getting spooked about problems that aren’t really there and creating more for those who actually know what they are doing.

One solution for those already holding cash in investment accounts is a money market fund, although these are by no means perfect. In March, I wrote how these portfolios invest in cash-like instruments and, as such, make decent yields (certainly more than the platforms will pay).

They can, however, fall in value, as the types of assets they invest in can include things like short-term bonds, which move in price. These funds also come with management fees (on top of platform fees), so the lower-yielding ones can be worse in real terms.

It is not a perfect replacement for cash, so investors should weigh up that risk and do their own research. But for some it could make for a viable alternative. That is, at least, until Reeves comes for these as well.

Jonathan Jones is editor of Trustnet. The views expressed above should not be taken as investment advice.