State pensioners will not be affected by the cut (Image: Getty)
A change coming to Cash ISA rules will hand state pensioners a boost worth more than £9,000, say financial experts.
The tax-free savings accounts allow savers to deposit £20,000 per year into them to protect from being taxed. It means that, even if you use up all of your £1,000 Personal Savings Allowance, you can continue to deposit more money into an ISA and not owe any tax on it.
However, Chancellor Rachel Reeves has announced a change to the rules which from April 2027 will massively reduce the amount savers can deposit into a Cash ISA in a single tax year, cutting them from £20,000 down to just £12,000, a 40% cut.
But following pressure from campaigners including Martin Lewis, the rule change will not apply to people aged 65 and over, meaning that the vast majority of state pensioners will not be affected, which could be worth as much as £9,400 back in pensioners’ pockets over the next 10 years.
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According to Laura Suter, director of personal finance at AJ Bell, the decision to hack away at the Cash ISA limits for those under 65 will ‘lead to bigger tax bills for the nation’, but not for over-65s.
The state pension age is currently 66, rising to 67 from April, so even from April 2027, the vast majority of people aged over 65 will be claiming the state pension.
Ms Suter stressed that despite the government’s plan to push people to invest, ‘in reality many people will just leave their money in non-ISA accounts and so pay tax on their savings interest.’
She told the Express: “AJ Bell research found that if the Cash ISA allowance was cut, most Cash ISA savers (51%) would simply stick the money in a taxable savings account.
“If they did this they would be landed with a juicy tax bill after a number of years. Someone who usually paid the full £20,000 into their Cash ISA, who was then limited to £12,000 from April 2027, would find themselves with £8,000 of cash looking for a home. If they popped it into a non-ISA cash account they’d face tax on their savings interest once they breach their personal savings allowance – while additional-rate taxpayers would pay tax on all their savings interest, as they get no tax-free savings allowance.”
Ms Suter added that, over the years following the change, the amount of money lost to tax ‘really adds up’.
She continued: “If you look at one year alone, and assume 4% interest on the cash, it doesn’t represent a huge sum of interest: just £320. This means it’s covered by the personal savings allowance for both basic-rate and higher-rate taxpayers, assuming they have no other taxable savings, and lands additional-rate taxpayers with a £150 tax bill. But over a number of years the tax bill really adds up.
“Over five years the total bill for an additional-rate taxpayer is £2,380 and over 10 years it totals a whopping £9,349 extra in tax. Even a basic-rate taxpayer, who gets a £1,000 tax-free allowance each year for their savings interest, will see a £240 tax bill after five years and a chunky £2,402 bill over the 10 years.”
Martin Lewis’ Money Saving Expert explains in its online guidance how over 65s are not affected by the new rules, therefore won’t be losing that money to tax. It said: “Aged 65 or older? There will be no change. The £20,000 cash ISA contribution limit will CONTINUE to apply.”
“So, the carve out for over-64s makes total sense and I’m pleased she listened.”