Analysis on decision to reduce the annual tax-free allowance for cash ISAs

Currently, the average cash ISA pays a rate of 2.79% a year*. A saver depositing £12,000 a year will take 28 years to save £500,000 compared with 19 years if they were able to save £20,000.

Savers depositing £12,000 a year into a current top 10 cash ISA paying an average rate of 4.17% will take 25 years compared with 17 years if they were able to save £20,000.

David Hunt, Head of Deposits, Investec, said: “The reduction in the annual cash ISA allowance makes it significantly harder for savers to build meaningful long-term wealth. Our analysis shows that saving £500k in a cash ISA will take an extra nine years.

“This highlights just how powerful consistent saving and the effect of compound interest can be over time, but also how sensitive those outcomes are to policy changes. The ISA has been one of the most successful savings vehicles in the UK, encouraging millions to save tax-efficiently for the future. The reduction in the annual limit will inevitably slow that progress for ordinary cash ISA savers, particularly those who are disciplined about maximising their yearly contributions.

“At Investec Save, we believe it’s more important than ever for people to make their money work harder. By seeking out competitive rates and making full use of available allowances, savers can continue to grow their wealth.”

* Investec Save research of easy access cash ISAs