With just over two weeks to go until this year’s ISA deadline, savers using cash ISA accounts are set to lose over £4 billion in real terms in the next tax year if inflation rates continue to rise as predicted.

The £269 billion currently held in cash ISAs[1] will only be worth an estimated £272 billion next year, as interest rates on cash ISAs have dropped to an average of 0.84% p.a.[2] Research from Willis Owen, the online investment service provider, reveals that when taking into account the aggregate forecast rise in inflation over the next tax year[3], the sum would need to grow to £276 billion for people to afford the same goods and services as they can this year.

Ten years ago, the best fixed rates on cash ISAs reached the dizzying heights of 5.9%.[4] Now savers are looking at rates which are less than a sixth of that.

Falling CoinsInvesting in stocks and shares ISAs has always provided a higher annual compound return – at 5.91% over the last ten years, compared to 2.57% for the average cash ISA.[5] But the combination of low interest rates and high inflation, now at a three and a half year high of 2.3%, are causing cash ISA savers to lose money in real terms.

Jason Chapman, Managing Director at Willis Owen, comments:

We’ve seen a dramatic fall in the rates available on cash ISAs in recent years, with some even dropping below those of a standard savings account. Savers are no longer being rewarded for putting money away for the longer term. But, despite this, cash ISAs remain a popular savings vehicle, encouraged by annual increases in the ISA allowance.

“For many, stocks and shares are still seen as some mystical way of achieving returns. The truth is that, over time, holding cash carries inflation risk and the real value of your money reduces. Of course, short term needs are always better held in cash or easy access accounts – however, it’s important to consider other options for your savings and investments over the longer term.

Important: Stocks and shares investing carries with it a higher level of risk than cash. Investing should be considered a medium to long term commitment, (normally 5-10yrs), as over short periods, markets can be more volatile and result in a wide range of positive and negative returns. The longer you stay invested, the greater the probability that your investment will generate a positive return. Although, there is no guarantee!

[1] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/547217/Full_Statistics_Release_August_2016.pdf

[2] https://moneyfacts.co.uk/news/retirement/cash-isa-vs-stocks–which-is-best-for-retirement/

[3] http://www.bankofengland.co.uk/publications/Documents/inflationreport/2017/feb.pdf, p33;


[4] http://www.thisismoney.co.uk/money/saving/article-1608072/Best-cash-Isas-for-2007.html

[5] https://moneyfacts.co.uk/news/retirement/cash-isa-vs-stocks–which-is-best-for-retirement/

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