Experts have shared some guidance about how to build up your savings (Image: Getty)
Savers have been encouraged to look over their savings pots ahead of major changes. From April 2027, the amount you can deposit into cash ISAs will be reduced.
Under current rules, you can deposit up to £20,000 each tax year as you choose, divided between cash ISAs or stocks and shares ISAs. But this is changing so that only up to £12,000 can be used as you want, while the remaining £8,000 will have to be used for investment-based accounts.
People aged 65 and over will be exempt from the new allowance rules. The idea of this is to encourage people to get into investing more as a way to build up their savings.
Charlotte Wheeler, senior wealth manager and chartered financial planner at JP Morgan Personal Investing, said that if you want to consistently be adding to your savings, it’s a good idea to first review your income and expenses.
She explained: “It’s worth breaking down your outgoings into mandatory spending (.e.g. rent, mortgage payments and bills) and discretionary spending like meals out or clothes shopping. This process can help you pinpoint areas that you may want to cut back on spending to prioritise long-term savings and investments.
Read more: HMRC clarifies one-week rule for how it taxes the state pension
Read more: DWP explains Universal Credit change and how it will apply to ‘all benefits’
“Even small changes, such as cutting back on daily coffee purchases, can significantly boost your savings over time. Once you have identified how much you can put away each month, setting up a direct debit for monthly contributions can help you automate your savings and build good financial habits.”
Ms Wheeler said there is a common misconception that you need a large amount of cash to put into investing or otherwise to start your ISA savings, whereas in reality even small amounts add up over time. She said: “Even starting with as little as £50 a month, you can benefit from tax-free compounding, and ‘the snowball effect’.
“You will also get to enjoy the satisfaction of seeing your money grow which can eventually be built over time into a sizeable nest egg.” With the ISA allowance changes on the horizon, Ms Wheeler said now is a good time to think about whether or not your money is working hard for you.
Too much held in cash
She said: “It’s important that people are aware of the risks with any financial decision, including saving. We know that UK consumers hold too much in cash which is being quickly eroded by inflation.
“For those with timeframes of more than three years, and have an emergency buffer, investing should be the default.” Although older savers will be spared from the new restricted ISA allowance rules, Ms Wheeler said older savers should also look at investing as an option.
She said: “For those with a saving time frame of more than three years, investing in a globally diversified stocks and shares ISA which holds a mix of equities and bonds can provide growth over the long-term. Even for those entering retirement who will still have access to the full £20,000 cash ISA allowance in the future, investing some savings into a globally diversified stocks and shares ISA offers a reasonable chance of achieving a return ahead of inflation over the longer term.”
James Norton, head of retirement and investments at ISA provider Vanguard, urged people to think about diversifying into investing. He said: “Keep enough cash for emergencies, three to six months is recommended, but let any excess work harder for you. Given inflation, it is very hard to achieve long-term goals like retirement or a house deposit through cash savings only.
“Once you’ve saved your emergency pot, start with a budget and work out how much you can afford to invest monthly, while meeting your day-to-day expenses. Then set up a monthly direct debit into your ISA, investing automatically, making use of the tax advantages ISAs offer.”
He said that while the ISA allowance changes may be “unsettling” for some savers, moving into investing doesn’t need to be complex. The expert said: “By focusing on four core principles – clear goals, a balanced and diversified portfolio, low costs, and the discipline to stay the course – investors can build confidence and give themselves the best opportunity to grow their wealth over time.”