Savers will have to wait as long as 48 years to build a £1m cash ISA pot if allowance is cut

Cash ISA savers may have to put money away for an extra 13 years to build a half a million pound savings pot and 16 more years for £1 million if the tax-free allowance is cut.

A reduced cash ISA allowance is rumoured to be one of the main policy changes in the chancellor’s Autumn Budget this week.

There is speculations that Rachel Reeves could halve the allowance to £10,000 or to £12,000 in an attempt to boost investment ideally into British stocks.

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But analysis by Investec has highlighted the impact this would have on cash savers, ultimately making it harder for them to build wealth.

Investec claims it currently takes 19 years to reach a half a million pound cash ISA pot, based on average rates, and 17 years for the top rates.

But it could take as long as 32 years with a reduced allowance.

There may also be fewer ISA millionaires, with the time taken to build a £1 million pot rising from 32 to 48 years with a reduced £10,000 allowance based on average rates.

Here is how a reduced cash ISA allowance would affect savers.

The cash ISA conundrum

Reeves is rumoured to be considering cutting the cash ISA allowance to push more money into the financial markets.

The hope is that this would benefit UK stocks and shares ISAs but there would be consequences for those who favour cash savings.

Currently, the average cash ISA pays a rate of 2.79% a year, according to Investec.

A saver depositing £20,000 a year into the typical cash ISA would take 19 years to reach the half a million-pound milestone, according to Investec Save analysis, with interest compounded and assuming no withdrawals.

This drops to 17 years for those who open a current top 10 cash ISA, paying an average rate of 4.17%.

However, a saver only depositing £10,000 a year into the average cash ISA would instead take 32 years to save £500,000 – an extra 13 years.

This falls to 27 years if using Investec’s one-year fixed rate cash ISA, currently paying 4.27%.

Building a £1 million cash ISA pot would also get harder. The research suggests it would take 48 years to get to £1 million based on a rate of 2.79% and 40 years at 4.27%. That compares with 32 and 27 years currently.

David Hunt, head of deposits at Investec, said: “Halving the annual cash ISA allowance would make it significantly harder for savers to build meaningful long-term wealth. Our analysis shows that saving £500k in a cash ISA could take an extra 13 years under the rumoured changes.

“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. Reducing the annual limit would inevitably slow that progress for ordinary cash ISA savers, particularly those who are disciplined about maximising their yearly contributions.”

The most recent rumours suggest the cash ISA allowance could be cut to £12,000 and even then it would take around 28 years to get to half a million pounds and 44 years for a £1 million tax-free pot.

There are also warnings that the reduced cash ISA allowance could hit building societies that often offer some of the top rates.

Andrew Montlake, chief executive at London-based Coreco, said: “While we understand the government's logic for encouraging growth and investment rather than saving, with any action there is a reaction.

"Cutting the cash ISA limit could have a real knock-on effect that restricts the level of money building societies get through the door.

"This will potentially mean fewer loans for borrowers, especially in niches such as holiday lets and adverse credit where many building societies come into their own.”