Investors face equity ISA ‘cash trap’

A consumer group has warned that from next year savers could fall foul of an equity ISA cash trap.

A new 22% tax will apply to interest earned on cash held in stocks and shares ISAs from April.

At the same time savers will be barred from transferring money out of a stocks and shares ISA into a cash ISA.

Fairer Finance warned that the changes could leave investors stuck holding low or no-interest cash with nowhere better to put it.

Its analysis of providers in its self-invested stocks and shares ISA ratings found that 21 of 46 providers – 46% – currently pay no interest at all on uninvested cash. The list includes HSBC and the Bank of Scotland group (Halifax, Lloyds, BofS and Scottish Widows), all of which pay interest only on their SIPP products, not their ISAs.

Since August 2024, the Bank of England base rate has fallen by 1.50 percentage points – a 29% drop. But many self-invested stocks and shares ISAs have cut their rates even harder and faster.

Of the 46 providers that Fairer Finance rates, 33 offer rates of less than 2% and 37 out of 46 offer less than 3%.

•               Interactive Investor: rates on higher cash balances (over £100,000) have fallen from a high of 4.75% in August 2024 to just 2.10% today – a 56% cut.

•               Hargreaves Lansdown: rates on balances below £10,000 have dropped by more than half, from 3% to 1.30%.

•               Aviva: has more than halved its rate since July 2024 – though it has also restructured its charges, scrapping its 0.40% cash holding fee in favour of retaining a slice of the interest earned instead.

James Daley, managing director at Fairer Finance, said: “It’s quite normal for investors to hold cash in their investment accounts. Income that’s not automatically reinvested or maturing investments, can legitimately build up cash on account, and many investors may take their time to decide where to allocate it.”

He said some investors may actively choose to increase their cash balances at certain parts of the market cycle but warned that penalising investors by not paying proper interest on cash holdings risks discouraging responsible investing rather than encouraging it.

Mr Daley said: “Consumers now face a triple blow: a new tax on cash held in their stocks and shares ISA, no ability to transfer back to a cash ISA, and investment platforms paying little or no interest.

“It’s now approaching three years since the FCA wrote to investment platforms raising concerns about how they treat interest earned on customers’ cash. Some brands responded by raising their rates – but many have stayed low, and a significant number have never paid interest at all.”

The FCA surveyed 42 investment platforms and SIPP operators in 2023 and in June 2023 alone, found those firms collectively earned £74.3m in revenue from retaining interest on client cash balances.

Mr Daley said: “With the base rate falling over the past two years, the question remains: are investment platforms still delivering fair value to their customers?”