The end of the cash ISA – Team Pickafund (here) makes some suggestions as to what to do with your money

1 – What are the rumours?

A recent article in the Financial Times (click here to read) initially revealed that major UK firms are urging Chancellor Rachel Reeves to reduce tax breaks for cash ISAs to encourage investment in stocks and boost the country’s financial services sector. The push comes from some financial institutions, who argue that over £300bn in cash ISAs could generate better returns for savers and support the UK’s equity market.

Since then the rumour mill has been in full swing, and many more articles have come out on the topic, suggesting that changes could be announced during the Spring Statement on March 26th, for instance, a reduced limit on the total amount one can contribute to a cash ISA every year (currently GBP 20,000).

One can argue that investing your savings coherently over the right time horizon could potentially grow your pot far more than if it were left in cash ➠ See our compound returns calculator, which shows you the fund categories that would have hit your returns in the past.

This is MONEY explains, that implicitly forcing people to move from cash in their ISA wrapper, to a more risky product, is not a good way to do things. Educating people on how to approach investing, rather than letting inflation eat away at their cash savings, would be a far better way of changing their mindset.

Pickafund is working hard to make this happen. Although we do not provide financial advice, we are bringing down barriers so that investing in funds becomes more intuitive and accessible.

2 – Where to allocate your money if the cash ISA is abolished or significantly restricted?

Assuming changes do happen and you are not able to maintain your existing balances fully in a cash ISA or cannot contribute as much as you would like to it going forward, what would then be the options available, if you are in no mood to take more risk with your capital but want to continue generating tax free income inside an ISA?

Below we review some relatively low risk ideas from the least risky to the more risky (click on fund category name to see all funds in this category)

GBP Money Market funds

These aim to provide capital preservation, liquidity, and a modest return, making them a popular choice for investors seeking a safe place to park cash.

Popular active money market funds in the UK include:

GBP Short-Term Government Bond funds

These aim to provide capital preservation, liquidity, and modest returns with low risk.

Passive options include:

GBP Short Term Diversified Bond funds

These funds aim to provide stability, modest income, and diversification, making them a good option for conservative investors.

Popular active Short Term Diversified bond funds in the UK include:

Passive options include:

GBP Short Term Corporate Bond funds

These funds aim to provide stable returns, modest income, and lower interest rate risk compared to longer-duration corporate bond funds.

Passive options include:

3 – What to consider when choosing a fund from the above?

Credit quality

Credit risk is a measure of the possibility that a borrower (such as a company or government) might fail to repay the money they owe to the fund. This means the fund could lose money if the borrower defaults on their debt, either by not making interest payments or failing to repay the principal amount.

Fund managers aim for the highest credit quality (lowest credit risk) but it’s worth understanding the risks involved with the types of loans/bonds the fund holds.

So at the very least check the fund mandate to see what the fund can invest in (commercial papers, bank deposits, government bonds, investment grade corporate bonds …)

Pickafund shows you the mandate for each fund on the detailed view page (click on a fund name to access this page)

Fees

Money market and short term bond funds typically have low fees, but it’s still important to check the ongoing charge (annual fee as a percentage of assets). Lower fees can mean better returns for you, especially over time.

So look for funds with a low ongoing charge, as high fees can eat into returns, especially for low-yield instruments like money market funds.

Pickafund allows you to sort and filter funds by ongoing charge

Yield

Money market and short term bond funds are designed to offer relatively stable, low-risk returns. However, the yield (interest earned) can vary depending on the types of securities the fund holds and current market conditions.

So compare the yields of different funds, but remember that higher yields may indicate higher risk.

Pickafund allows you to sort and filter funds by trailing 12 month yield

Fund size

Larger money market funds tend to benefit from economies of scale reducing fees as a percentage of assets under management (AUM). Transaction costs and operating expenses, coming from things such as administration and compliance, are spread across a bigger pool of assets.

Pickafund allows you to sort and filter funds by net assets

Fund ratings

Check fund ratings from research outfits like Morningstar or Lipper.

Pickafund shows you the Morningstar rating for each fund on the detailed view page (click on a fund name to access this page)

4 – Risk analysis

The main risks when investing in debt instruments are credit risk and interest rate risk.

For the funds discussed here:

– Credit risk is minimised by getting exposure to mainly highly rated borrowers (UK government, investment grade corporates).

– Interest rate risk is minimised by keeping debt maturities short.

However, both still matter and can result in a rise or fall in the value of your investment.

In the case of money market funds, movement in price due to credit risk should be minimal and whilst they will not suffer mark to market due to interest rate risk, the interest they accrue will be impacted.

Bond funds on the other hand will suffer mark to market from both credit risk and interest rate risk.

In order to get an idea of how much exposure to your capital you are taking by investing in some of the above funds let’s go back in time and look at the price moves they experienced through two fairly recent, extreme, events:

Post COVID-19 rate hikes cycle to illustrate interest rate risk

At the end of 2021/beginning of 2022, the market started pricing steep BOE base rate increases in response to much higher than target inflation.

The base rate eventually went from 0.1% in November 2021 to 5.25% in September 2023, so a total increase of 5.15% in the span of just 22 months.

COVID-19 lockdowns to illustrate credit risk

In March 2020 markets all over the world collapsed due to countries (and their economies) shutting down and going into lockdown.

Due to the sudden stop in economic activity, markets started pricing in much higher credit risk across all borrowers but governments.

Eventually, in both cases, the losses were pretty much made back in full on the above funds but the problem would have been if you had to / chose to exit at the bottom, you would have crystalised the negative mark to market into a real loss.

5 – Platforms

In order to see which funds are available on your platform of choice use the Pickafund platform filter

After you have chosen a fund to invest in, to view which of its share classes are available on a given platform, go to the PIckafund Investment Platforms page by clicking on the INV icon in the fund box.

Once on the page, select your platform from the “Where to Trade” drop-down and you will see all share classes* of the fund available on this platform.

To go to a specific share class page on a platform, click on the platform code attached to this share class.