- Rumours surrounding the fate of the Cash ISA have spurred some investors to seek cash-like returns from investment products
- The popularity of cash alternatives, such as money market funds and bonds, has increased in recent years following a period of higher interest rates
- Five ways to invest in cash alternatives using your ISA
Laura Suter, director of personal finance at AJ Bell, comments:
“The government is rumoured to be looking at restricting the amount of cash that people can hold in an ISA in next week’s Budget. Nothing is confirmed, but some reports claim the cash portion of the annual ISA allowance could be restricted to £12,000 from the current £20,000.
“Many who would otherwise have stuck that money into a Cash ISA may be looking for alternatives providing lower risk, cash-like returns. Recent figures from AJ Bell highlighted that investment returns have significantly outpaced cash since ISAs were launched in 1999, with investors more than tripling their money, while cash savers barely beat inflation.
“However, investing doesn’t have to be full risk. There are lots of lower risk, cash-like alternatives people can invest in through their Stocks and Shares ISA. Here we look at some of the options and when they may work.”
Money market funds
“Money market funds have boomed in popularity in recent years and invest in short-term debt like bank deposits, government loans and corporate loans. The managers of these funds will select a mixture of different investments to manage the money on your behalf, aiming to preserve your money while giving a cash-like return. Sometimes the loans are so short-term they only take place overnight. This means the funds tend to be very liquid – meaning you can access the money easily – providing a good cash alternative.
“There are two sectors that group together money market funds called the IA Standard Money Market sector and the IA Short-Term Money Market sector. Funds in the short-term sector are required to hold more of their portfolio in short-term assets, in theory making them more liquid and secure.
“Over the past year the average fund in the short-term sector has delivered a total return of 4.35% and the average of funds in the standard sector was 4.54%, with higher interest rates having pushed up the returns in recent years*.
“There are lots of money market funds out there, so investors need to weigh up their options. Generally, if the fund is offering higher returns than its rivals it will be investing in slightly riskier debt or longer-term debt, while lower return options will be in shorter, lower risk options. It’s important to weigh up the balance that’s right for you.”
*Figures from FE, based on IA Short Term Money Market Funds and IA Standard Money Market funds, in GBP, accurate to 10 November 2025.
Bond funds
“In simple terms, bonds are just a loan. Investors lend money to governments or companies, and in return they get regular interest payments and their original investment back at a set date in the future. For years, the interest on bonds was pretty lacklustre, leading some to jokingly call them ‘return-free risk’. But that’s all changed as interest rates have risen. These days, investors can find far more appealing yields from bond funds.
“It’s worth remembering that bond funds can move up and down in value. If markets start to think interest rates will rise (or not be cut as fast as previously expected), bond prices usually fall. So, while they’re generally lower risk than shares, they’re not risk-free.
“That said, bonds can play an important role in smoothing out the bumps in your portfolio. Government bonds in particular often move in the opposite direction to shares, which can help balance things out when stock markets are volatile. There are lots of flavours of bond funds to choose from. Some stick mainly to government bonds, while others focus on corporate bonds issued by companies. Strategic bond funds have more freedom to move around the market and pick where they see the best opportunities.
“Then there are high-yield bond funds, which invest in the debt of riskier companies with lower credit ratings. They offer higher potential returns, but are also higher risk, so they’re best suited to investors who are happy to ride out more ups and downs in exchange for extra income.
“One thing to factor in for bond funds is the average duration – so how long the underlying investments have until maturity. Shorter-duration funds are less sensitive to interest rate changes, while longer-duration funds can potentially offer higher returns but with more risk. Equally, where the funds are investing will impact the risk of the portfolio. For more safety, sticking to government bonds and highly rated corporate bonds may be the best option.”
Short-dated bonds
“Investors don’t have to buy a fund, they can also invest in bonds themselves. For example, in recent years we’ve seen an uptick in the number of investors buying gilts (UK government bonds). Short-dated bonds are bonds that will mature (so repay the investor) in a short time, usually under two to three years. Because they are short-term, they are less sensitive to interest rate changes.
“Gilts are loans to the UK government, and so it’s pretty certain you will get your loan repaid, along with the interest promised. If you want to take more risk you can opt for corporate bonds. However, corporate bonds are considered less safe because they are loans to companies, which are deemed more likely to default on their obligations than the UK government.
“The prices of bonds fluctuate on the market, but there will be a maturity date for each bond, at which point you will get the maturity value of the bond back, unless there is a default. The maturity value, also called the par value, may be more or less than you paid for it, depending on the price you bought at. If a bond trades below par, it means your total return between now and maturity will come from both interest payments and potential capital gains.
“An appeal of gilts is that investors aren’t liable to capital gains tax on them, so if you can find a gilt where a lot of the yield is coming from capital returns rather than interest, you can save on your tax bill. This is where we have seen a lot of activity in the gilt market, with short-dated, low coupon gilts being effectively used as a tax-efficient cash alternative.
“Because individual bonds can be complex, this strategy is generally better suited to experienced investors or to those willing to do the detailed research involved.”
UK Treasury bills
“Treasury bills (or T-bills) are short-term loans to the UK government. When you buy one, you’re effectively lending money to the government for a few months – typically one, three or six months. Rather than paying interest, they’re sold at a discount and repaid at face value. So, if you buy a £1,000 T-bill for £980, you’ll receive £1,000 when it matures, with the £20 difference being your return.
“In essence, they sit between cash savings and traditional bonds: low risk, but with returns that tend to beat standard savings accounts. The main draw of T-bills is safety. They’re backed by the UK government, which makes them one of the most secure investments available. While no investment is entirely risk-free, the likelihood of the government defaulting is extremely low.
“Another plus is their short duration. Many investors don’t want to lock money away for years in a fixed-rate savings account or bond that has a long time until it matures (also known as long-dated). With T-bills, your money is typically tied up for only a few months, meaning you can decide at each maturity whether to reinvest or withdraw.
“T-bill rates don’t have a fixed return like a bank account. Instead, the price you pay for them is determined at weekly government auctions. Investors submit bids, and the final rate depends on demand at that auction. That means you won’t know the exact return until after your bid is accepted – but in a high-interest-rate environment, recent yields have remained competitive.
“However, one thing to note is that once you’ve bought one, your money is locked in until maturity – there’s no early exit. Unlike other government bonds or shares, you can’t sell them on a secondary market. This works in a similar way to fixed-rate savings accounts.”
Multi-asset funds
“Investors looking for a one-stop-shop for their portfolio could use multi-asset funds, which spread money between different asset classes to give a diversified portfolio. Investors can opt for different risk levels of these funds to suit their needs, with the lower risk end of the spectrum investing more in bonds, money market options, cash and cash alternatives.
“If you’re looking specifically for options that include a lot of bonds and cash, you’ll need to look under the hood to see what different funds actually invest in, as there is no one-size-fits-all for lower risk multi-asset funds.”
