Ask ii: I turn 65 in Jan 2028 – how will ISA reforms affect me?

A reader asks: “I’ve read about the ISA changes being introduced from the next tax year but am still unclear about how they will apply to me. I get that I’ll pay tax on interest generated from cash allocations in my stocks and shares ISA, but the rules around money market funds are confusing. I’m also not sure whether I’ll get a lower cash ISA allowance in 2027-28 as I turn 65 in January 2028.”

Craig Rickman, personal finance editor at interactive investor (pictured above), says: Thanks for your question on this red hot and rather controversial topic. As you mention, the government has unveiled some big changes to the individual savings account (ISA) landscape which will take effect from April 2027. Rest assured, you’re not alone in struggling to get your head around the new rules, which are messy in parts.

Given the popularity of ISAs (around 15 million accounts were opened in 2023-24) it’s important to understand how the changes will apply to you personally. Otherwise, you could overshoot the annual limits, end up paying a tax charge, or break eligibility rules. It’s also helpful to learn the instances where you can transfer between ISA types and in which direction.

The headline reforms were announced by the government at last year’s set-piece fiscal event, which subsequently created a host of unanswered questions. A recent update has added more meat to the bone, but there’s a bit of complexity to wade through.

Let’s break down the various components and explain how they apply to you specifically based on what we know right now.

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Chancellor Rachel Reeves announced at the Autumn Budget 2025 that from 6 April 2027, the annual cash ISA limit for people under 65 will fall to £12,000. As such, those affected will need to place at least £8,000 in a stocks and shares ISA or innovative finance ISA to max out their £20,000 allowance.

The aim of this policy is two-pronged: first, to encourage more people to boost their future wealth by investing cash holdings instead of leaving them in low-yielding accounts. Second, to funnel more money into the domestic stock market and stimulate the economy.

The government, however, is concerned that savers might try and circumvent the rules by saving their full £20,000 allowance in cash or cash-like instruments across ISA types.

To guard against this scenario, it has applied certain restrictions, which were outlined in a factsheet published on 23 June. These are a 22% tax charge on interest paid on cash held in stocks and shares ISAs and innovative finance ISAs, banning transfers from stocks and shares ISAs to cash ISAs for under 65s, and non-cash ISA portfolios comprising 100% cash-like assets (money market funds) will be deemed “non-qualifying investments”.

To explain the attraction of money market funds for savers, they own a diversified basket of safe bonds that are due to mature soon, normally within a couple of months, meaning that you can earn income on your cash with minimal risk.

To note, the anti-circumvention rules are subject to a technical consultation with the industry, and the regulations will be laid out in the autumn.

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With regards to your question around whether your ISA allowance will drop to £12,000 as you’ll be age 64 at the start of the coming tax year, you don’t have to worry. As the ‘anti-circumvention’ factsheet states “entitlement to which will apply from the start of the tax year in which an individual turns 65.”

Simply put, provided you reach age 65 before 5 April 2028 - the last day of the next tax year - you won’t see your cash ISA allowance fall to £12,000 and won’t temporarily lose the facility to switch holdings from a stocks and shares ISA to a cash ISA.

But while the 22% charge on interest paid on cash in non-cash ISAs and the money market fund restrictions have been designed to stop those with a smaller cash ISA allowance from “gaming the system”, these rules won’t be lifted once you reach a tax year where you turn age 65.

There are, however, some simple ways to dance around the money market fund restrictions, as the following comment from the factsheet outlines.

“Cash-like assets will be eligible for non-cash ISAs, provided that they are partial allocations and do not make up 100% of the investments in an individual’s non-cash ISA account.”

So, in essence, provided you invest some of your stocks and shares ISA holdings, you can place the rest in money market funds if you wish. You don’t even have to plump for anything racy, as the list of non-cash-like assets is broad: “Individual shares, funds, investment trusts, exchange-traded funds and corporate and government bonds, including UK gilts.”

For instance, in 2027-28 someone under 65 could put £12,000 in a cash ISA, £7,900 in a money market fund, and £100 in gilts or a gilt fund (investments effectively one rung up from money market funds on the risk spectrum), and their money market holdings will remain eligible.

One final thing to say is that while investors will inevitably seek to avoid unnecessary penalties and restrictions on their stock and shares ISA holdings, the need to invest in the most suitable assets to support your long-term financial goals remains front and centre.

Money market funds and cash have an important role to play in portfolio construction, acting as a safety net to meet emergency spend and help support short-term goals, but the prospects for long-term growth are low. Holding too much in safer assets over extended periods means your wealth is more vulnerable to the corrosive effects of inflation.

No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii. Email yours to: ask@ii.co.uk