Tax-free savings accounts set to lose thousands as inflation keeps climbing
The rise in inflation means cash ISAs are set to lose thousands in real terms over the next five years.
The average interest rate on a cash ISA rate is currently 0.31 per cent, per the Bank of England on 31 July, while the rate of inflation is now 3.2 per cent.
At these rates, £20,000 in a cash ISA will gain £312 in interest over the next five years whereas it would gain £3,465 if it kept pace with inflation.
This means that £20,000 put in a cash ISA today would lose 17 per cent of its value in real terms over the next five years as its purchasing power decreases.
Discussing the calculations, Charles Incledon of Bowmore Asset Management explained to City PM that banks continue to offer rock-bottom interest rates on their cash ISAs as the Bank of England base rate remains at a historic low of 0.1 per cent.
The best instant access cash ISA is currently offering just 0.6 per cent interest, meaning it would return a meagre £609 over the next five years from a £20,000 deposit.
Incledon said people will not beat inflation without investing in assets with a greater potential for growth. Putting money into diversified funds can give investors broad exposure to a range of assets that perform better than cash.
“The interest rates on ISAs are so low that leaving money in one today will just mean watching inflation whittle it away.”
“The rise in inflation should make savers reconsider where they are putting their money. People with money sitting in cash ISAs should be assessing their options with returns getting worse and worse,” he added.
“Investing in funds gives people a better opportunity to beat inflation. Typically, returns from equities outperform cash over the medium and long-term,” Incledon concluded.