Fight back against the Isas destroying your savings

Money held in cash Isas has lost more than £250 per account in real terms since 2014, discovers

Savers have lost the equivalent of £1 every week thanks to inflation eroding the value of their hardearned cash.

Analysis for Telegraph Money by Ratesetter, a peer-to-peer firm, showed the average cash Isa holder has seen the real value of their savings fall by £252 over the past five years.

A long period of low interest rates coupled with relatively high levels of inflation is to blame for savers’ woes, causing their wealth to be whittled away.

The average cash Isa held £5,924 in the 2014-15 tax year, according to official figures, and over the five subsequent years would have grown to £6,154 based on average interest rates for cash Isas, Ratesetter found.

However, if the initial investment had grown in line with inflation, it would be worth £6,406.

Savers who have already seen their cash eroded by inflation in the past five years are unlikely to receive any respite soon. Inflation is currently 1.8pc, which is considerably higher than the average cash Isa rate of 0.57pc.

Ratesetter found that the interest earned on cash Isas in a year would often fail to cover even minor expenses. Today, the average cash Isa holds £5,114. Based on the average interest rate, this would earn savers just £29.15 in a year.

Rhydian Lewis, of Ratesetter, said: “Cash Isas provide certainty on the returns they deliver – but in reality this simply guarantees that inflation will nibble away at your money faster than it can grow.”

According to Savings Champion, a comparison service, no cash Isas currently available beat the 1.8pc rate of inflation.

This has prompted many savers to use investment Isas in order to boost their wealth. But in light of recent stock market turmoil, Anna Bowes of Savings Champion said savers could be tempted to move their money to standard savings accounts instead.

“With the damaging combination of reducing rates on savings accounts and an increase in inflation, there are now just 42 savings accounts that match or beat 1.8pc inflation – some of which are only available to existing customers.”

Even if most accounts cannot beat inflation, Ms Bowes warned savers not to leave their cash with banks offering low rates.

“If you leave your funds languishing in an easy-access account paying 0.1pc, although a deposit of £50,000 would grow to £50,251 over five years, it would have fallen to just £45,962 in real terms, assuming an inflation rate of 1.8pc,” she said.

“If you were to choose the best easyaccess account available today, paying 1.31pc, while the value of your money in real terms will have fallen, it would be worth £2,846 more, at £48,808.”

Ms Bowes said that savers willing to lock in for the long term could achieve a rate of 1.9pc with RCI Bank, subject to having a £50,000 deposit. As this is not an Isa, savers face having their interest taxed, she added.

However, for savers with a smaller nest egg, the introduction of the personal savings allowance has meant that many can save outside of an Isa without fear of being taxed.

Since April 2016, the allowance has allowed savers to earn tax-free interest of up to £1,000 each year if they are a basicrate taxpayer. Those who are higher-rate taxpayers, earning over £50,000 in the 2020-21 tax year, can receive £500 in interest without paying tax. Additional-rate taxpayers earning more than £150,000 do not receive any allowance.

These savers can also benefit from higher interest rates outside of Isas. A customer happy to lock their cash away for a year can receive an interest rate of 1.37pc from Ford Money’s 12-month fixed-rate Isa, for instance. But a standard one-year savings bond from Smart Save would earn the same saver 1.56pc.

Ms Bowes said that savers would typically receive higher interest rates when saving outside of an Isa. “But for those who find themselves close to or actually breaching the personal savings allowance, it’s more important to make sure they can use their full Isa allowance.”

Today, a basic-rate (20pc) taxpayer would need to have £76,336 in savings in the top-paying 1.31pc easy-access account to exceed the annual allowance and have to pay tax. However, Ms Bowes added: “If interest rates were to rise, savers could find themselves breaching the personal savings allowance with smaller deposits.”

Some providers have taken drastic steps to increase the appeal of their offers in what has, so far, been a quiet “Isa season”. Nationwide has launched a prize draw for all savers who deposit £100 in an Isa between now and April 30. New and existing customers can win one of 10 top prizes of £20,000 when they save.