Cash Isa savers continue to lose money in real terms due to inflation, despite rising interest rates.
Analysis by wealth management firm Quilter reveals that Cash Isa savers have lost, on average, more than 5 percent of their savings in real terms over the past 12 years, due to the gap between savings rates and the inflation.
This represents a major loss for savers.
But the picture has improved since late last year, when inflation was at its peak and savers were suffering near-double-digit losses.
Inflation attack: Cash ISA savers have suffered losses of more than 5 percent of their savings in the last 12 years
When inflation reached 11.1% in the 12 months to October 2022, the monthly interest rates available for Isa’s cash deposits stood at just 1.69%, meaning that Isa’s cash savers Isa suffered a loss in real terms of 9.41%.
Even in March 2023, savers suffered a loss in real terms of 8.15 percent.
But July 2022 marked the biggest loss in more than a decade as savers faced a 9.42 percent drop. This was the largest loss in real terms of Isa’s cash savings in more than a decade, more than triple the previous highest loss of 2.81% in November 2017.
While the average Cash Isa rate is now 2.62 per cent according to the Bank of England, there are much more competitive rates on the market with the best easily accessible Cash Isa currently coming in at 4.30 per cent and a two-year fixed rate of 5.90 percent
> Find the best cash Isa rates on our independent leaderboards
Quilter has warned cash savers to “watch out for the inflation gap” and called for cash Isas to have additional risk warnings in times of high inflation so people fully understand how their capital will erode in real terms.
The best accounts at a glance
Easy access: Chip* – 4.51%
Fixed rate for one year: Vanquis Bank – 6.15%
Two-year fixed rate: Vanquis Bank– 6.2%
Easy Access Cash Isa: leeds BS – 4.2%
Cash to one year Isa: NatWest – 5.7%
Effective two years Isa: NatWest – 5.9%
The products featured in this article are independently selected by This is Money specialist journalists. If you open an account using links that have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
According to the latest available data from HMRC, around 11.8 million Adult Isa accounts were subscribed in the year 2021 to 2022, of which 920,000 were cash Isas.
Rachael Griffin, Quilter’s tax and financial planning expert, commented: “With inflation stubbornly high and the Bank of England raising interest rates to 5 per cent, savers should be getting higher returns on their cash.
‘However, many banks and mortgage societies, although they are quick to broadcast the increases in mortgage rates, still increase their rates on products such as cash Isas.
‘Although the picture has improved in certain corners of the market, even savers with the best rates will see a 3 per cent loss in real terms.
‘Although cash Isas have long been perceived as an easy way to save money with relatively little risk, they are still affected by the impact of inflation.
“But now, with inflation reaching 30-year highs and interest rates on cash savings still lackluster, it may be time for people to consider alternatives.”
What can you do to protect your savings?
Interest rates on non-Isa savings accounts are typically higher than comparable Isas. If you don’t earn enough interest to need the tax-free benefits of an Isa account, opting for an easily accessible or fixed-term savings account could help you close some of the inflation gap.
Basic rate taxpayers qualify for a personal savings allowance of £1,000. This means they can receive up to £1,000 a year in savings interest tax free.
Higher rate taxpayers have a PSA of £500 each year. Additional Rate filers do not receive a PSA.
As savings rates rise, more people will need to start paying taxes.
But if you’re going to receive less than the above amounts in interest, then a standard savings account may make more sense.
Real returns: Quilter says Cash Isa savers have lost, on average, more than 5% of their savings in real terms over the past 12 years, due to the gap between savings rates and inflation
If you won’t need the money for years to come, investing could help your cash work harder and have a better chance of generating a level of return above inflation over the life of the investment, although there is also the risk of that the value goes down.
A good rule of thumb is to save three to six months of your salary in cash, and then invest in a variety of different assets that can generate long-term returns. But everyone’s circumstances are different, so it’s important to seek personal financial advice.
Someone who invested £10,000 in a cash Isa in January 2011 would currently have £11,472.09. Adjusted for inflation, this is just £8,041.
By contrast, a £10,000 investment in shares and shares of Isa, held in the IA Global Equity Index for the same period, would be worth £26,956 or £18,901 after inflation. These figures do not take into account charges that may reduce the final amount.
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