How Cash ISA savers are seeing “the biggest erosion in their wealth in 40 years”

man sanding wood with an orbital sander

Keeping some savings in a Cash ISA can be a great way to shield your money from Capital Gains and Income Tax.

However, a new report has revealed that, if you are storing money in Cash ISA, your wealth is being eroded at the fastest rate in more than 40 years.

If you have a significant sum invested in a Cash ISA, the spending power of your money is likely at its lowest level since the 1980s. Here’s why.

Cash ISA savers seeing their wealth eroded at the fastest pace in decades

A report published by FTAdviser shows that Cash ISA savers are seeing their wealth eroded at the fastest rate in decades as soaring inflation outpaces the rate of return on these tax-efficient accounts.

According to the analysis, the current average interest rate for all open Cash ISAs sits at 1.74%. Considering that a total of £285.5 billion is currently invested in Cash ISAs in the UK, savers are earning only £5 billion in interest.

This is “only a small fraction” of the £31.7 billion in interest payments that savers would need to keep pace with inflation.

Consequently, savers are losing out on an eye-watering £26.7 billion in interest payments when comparing the average Cash ISA rate to the rate of inflation, which reached 11.1% in October 2022.

If you hold too much of your wealth in a Cash ISA, your spending power can easily be eroded by inflation.

The Office for National Statistics (ONS) say that, in the year to November 2022, inflation stood at 10.7%. So, on average, goods and services that cost £1,000 a year ago cost £1,107 today.

FTAdviser report that the average Cash ISA interest rate is 1.74%. So, on average, £1,000 invested in a Cash ISA a year ago is worth £1,017.40 today.

You can see that the spending power of your savings has diminished significantly in the last 12 months, as the money you have saved will not buy the same amount of goods and services as it did a decade ago.

Cash ISA rates are not rising as quickly as general interest rates

Despite the Bank of England’s decision to increase interest rates to 3.5% in December in an effort to tackle inflation, the rates on savings accounts and Cash ISAs still lags behind the Bank’s base rate.

As of 21 December 2022, Moneyfacts show that there are no Cash ISAs paying a rate as high as the current base rate of 3%.

Rachel Springall from the analysts told the Guardian: “As we have seen time and time again, there is no guarantee savings providers will boost their rates because of a Bank of England rate rise and even if they do it could take a few months to trickle through to customers.”

3 quick steps to improving your returns

  1. Shop around for a better ISA rate

If you want to keep your savings in a Cash ISA, you should shop around to see if there is a better rate available. Many providers will allow you to transfer ISA existing savings into a new Cash ISA – but be sure to mention this is what you want to do when you approach a new bank or building society.

You could significantly increase your returns by shopping around. For example, as of 21 December 2022, NatWest pay just 0.5% on their Cash ISA (on balanced below £25,000). Compare this to Nationwide, who offer 2.5% interest on their Cash ISA, as long as you don’t make more than three withdrawals a year.

  1. Consider Premium Bonds

If you want a tax-efficient investment but a guarantee that your cash is completely safe, Premium Bonds could be an alternative.

While you can’t guarantee a win – and so you may never earn any returns on your investment – National Savings & Investments have recently increased the annual prize fund rate to 3%. Any prizes are paid tax-free, and you can withdraw your cash whenever you want to without penalty.

If you’re lucky, you could win a prize of up to £1 million.

  1. Invest any surplus cash

If you don’t plan to use the funds in your Cash ISA for five years or more, investing them could generate returns that help your money to keep pace with inflation.

While investment returns cannot be guaranteed, historically they have provided a superior return than cash savings.

We can help you to design a diversified portfolio that considers your investment goals, your time horizons, and your attitude towards risk.

Get in touch

If you have Cash ISA savings and would like to explore how you might improve your returns, please get in touch for a chat.

Email or call us on 01454 416653.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

What do our clients have to say?