As Cash ISA changes approach, is now the time to buy UK shares for long-term wealth?
With changes to the Cash ISA on the horizon, demand for UK shares may be about to heat up. Chancellor Rachel Reeves’ likely ISA shake-up is designed to help savers achieve better returns on their cash.
We may not know the changes for several months, but restricting the Cash ISA allowance to £4,000 is one much-discussed change urged by City analysts.
I’m a firm believer in the importance of holding cash on account. I do it. But I don’t believe there’s a reason for savers to panic ahead of any potential changes. A recent report from UK-based investment management company Charles Stanley on changes to the ISA regime underline why.
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Reasons NOT to be fearful
According to its chief investment analyst Rob Morgan, there are five reasons why users of these cash products shouldn’t worry:
1. The Cash ISA is unlikely to totally disappear, with the government pledging to “get the balance right between cash and equities to earn better returns for savers, boost the culture of retail investment, and support the growth mission.”
2. Cash savers already enjoy a tax-free savings allowance of £1,000 outside the ISA.
3. People can transfer funds in a Stocks and Shares ISA into a Cash ISA, a rule that (if sustained) could see individuals circumvent reduced allowances on cash products.
4. Individuals can also access low-risk options outside a Cash ISA, such as money market funds and short-dated government bonds.
5. Cash accounts “may not be a good home for long-term money.”
Morgan notes that someone who invested £100 a month into a Cash ISA would have £38,493. By comparison, a Stocks and Shares ISA investor who put that into global shares instead would now be sitting on £160,849.
Here’s what I’m doing
I’ll plan to continue saving in a Cash ISA even if current rules are shaken up. They provide me with a place to hold emergency cash tax-free. They also allow me to diversify my portfolio.
But, as I’ve already been doing, I’ll continue using the majority of my surplus money each month to buy shares, trusts and funds in my Stocks and Shares ISA and my Self-Invested Personal Pension (SIPP).
One fund I currently hold is the Xtrackers MSCI World Momentum ETF (LSE:XDEM). It’s a financial vehicle I think is worth nervous Cash ISA savers considering if they’re thinking about some alternative investments.
This exchange-traded fund (ETF) has holdings in large- and mid-cap companies “with high momentum scores“, providing the possibility for long-term capital growth while reducing the danger to investors’ capital.
In total, the fund has positions in 350 different shares from across the globe and spanning many sectors, making it an effective way to limit risk. These include household names from the UK such as Rolls-Royce, Unilever and Barclays.
The vast majority (73.8%) of the fund is tied up in US shares, which is more regional risk than ETFs with a more globally diversified allocation. But it also means it’s packed with heavyweight growth stocks including Nvidia and Apple that could deliver stunning returns.
Over the last decade, this Xtrackers product has delivered an average annual return of 11.6%. That towers above the corresponding average of 1.21% that Cash ISAs have provided, and underlines the wisdom of investing in UK and overseas shares.
The post As Cash ISA changes approach, is now the time to buy UK shares for long-term wealth? appeared first on The Motley Fool UK.
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Royston Wild has positions in Xtrackers (ie) Public – Xtrackers Msci World Momentum Ucits ETF. The Motley Fool UK has recommended Apple, Barclays Plc, Nvidia, Rolls-Royce Plc, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
