With the Bank of England raising interest rates to 4% for the first time in over three years today, and continued geopolitical uncertainty, it’s no surprise some investors are feeling cautious.
Even so, that shouldn’t put you off making the most of your ISA allowance as and when you can. A Stocks and Shares ISA doesn’t mean you have to dive straight into the stock market – you can also invest in cash funds (also known as money market funds), giving you a lower-risk way to shelter your money tax-efficiently while you decide your next move.
So, what exactly are cash funds?
Think of cash funds like having a piggy bank that’s managed by professionals. Instead of your cash sitting idle, these cash funds invest your money into very safe, short-term financial products. These products can be things like treasury bills (short-term loans to governments), certificates of deposit (short-term savings at banks), or short-term bonds from reliable governments and companies.
Imagine, you’ve saved £100,000 to do an extension on your house. Your plans are waiting approval, and your builder can’t start on your project for at least nine months. You want to keep your money safe as you need every penny and easily accessible, but you’d like to earn a little interest, too. A cash fund within a Stocks and Shares ISA could offer safety, flexibility and modest returns.
Why would you invest in a cash fund in a Stocks and Shares ISA?
Here are a few reasons why investors buy cash funds.
1. Keeps your money relatively safe
Unlike investing in shares (where the value can rise and fall quite dramatically) cash funds are much steadier. They’re good for protecting your savings when the market gets bumpy.
That said, relatively safe doesn’t mean risk-free. Cash funds can still be affected by interest rate changes, market conditions and the financial strength of the institutions they invest in.
2. Provides easy access to your money
If you urgently need your money, it typically takes up to seven working days to access it, depending on the fund you’ve invested in. Many of the high street’s competitive savings accounts require you to lock your money away for a fixed time.
3. Helps balance your investments
Let’s say your portfolio holds a range of riskier assets – such as shares or funds that contain property or equities in them. Holding some cash funds can help balance things out, reducing your risk if the stock market has a rough patch. It’s good practice not to put all your eggs in one basket, otherwise known as diversification.
4. No UK tax on growth
Under current rules, any interest or returns your cash earns within a Stocks and Shares ISA won’t be taxed. So, if you’re thinking of keeping some money safe temporarily while you plan your next move, this is a way to do it without worrying tax.
5. Offers reliable (but modest) returns
Cash funds are at the lower end of the risk / reward spectrum. It means they don’t have the same potential for growth as investments at the higher end of the spectrum (such as shares), they do offer slow and steady growth, giving you peace of mind.
Other points to consider when thinking about investing in cash funds
Cash funds have some great benefits, but it’s also worth keeping the following in mind.
Lower growth than other investments
In the long run, cash funds might struggle to beat inflation – by much, if at all. Inflation is when things slowly get more expensive over time, reducing what your money can buy. This means if you leave your cash in these funds for many years, it might not grow enough to keep up with rising prices.
Check the fees
Some cash funds charge management fees. Make sure to look for a fund with low fees, because higher fees can eat into your profits.
Interest rates matter
When interest rates go up, cash funds typically offer better returns. But if interest rates drop, your returns will probably shrink, too.
Are there any upcoming ISA changes?
The government has reversed plans in the 2026 Autumn Budget to cut the annual cash ISA allowance to £12,000 for under-65s from April 2027. The allowance will remain at £20,000, and proposed restrictions on holding cash within stocks and shares ISAs have also been scrapped. Instead, the government is considering a ‘new ISA incentive’ to encourage people to invest in a stocks and shares ISA for the first time.
Simple steps to investing in cash funds in a Stocks and Shares ISA
1. Open a Stocks and Shares ISA – If you don’t already have one, you’ll need to open a Stocks and Shares ISA. Learn more about opening a Stocks and Shares ISA.
2. Add money to your ISA – the next step is to pop some money into your account. You can either invest a lump sum or set up a regular savings plan. Login in to add money.
3. Choose a cash fund – here’s a list of the cash and money market funds that we hold on our platform. The accumulation funds are listed below, but note we also have Income versions for many of these funds. Make sure you do your research before picking one that’s right for you. View our Investment Finder for the latest funds.
- abrdn Sterling Money Market Fund
- BlackRock Cash Fund
- Fidelity Cash Fund
- Invesco Money Fund UK
- Legal & General Cash Trust
- Royal London Short Term Money Market Fund
- Royal London Short Term Fixed Income
- Royal London Short Term Fixed Income Enhanced
- WS Keyridge Sterling Liquidity Fund
4. Invest
Once you’ve chosen a cash fund, you need to buy it. Log in to your account, click on invest now, then ‘buy’ and then ‘add investments’. You can then search for your chosen cash fud. Log in to your account to buy a cash fund.
5. Monitor and manage your investments
It’s worth reviewing your cash holdings regularly to make sure they continue to meet your needs. While holding cash can offer some stability, inflation can gradually erode its buying power. With inflation currently at 3.5%, it’s important to consider whether the returns you’re earning are keeping pace with rising prices, and whether holding cash still makes sense for your goals.
