The £500 reason your cash Isa is sinking

As inflation starts to bite, cash Isa savers are seeing their wealth plummet – but there is another way to stay afloat. By Will Kirkman

Cash Isa savers will lose nearly as much of their purchasing power this year as in the whole of the past decade after paltry interest rates failed to match soaring inflation.

The consumer prices index hit 5.5pc in the year to January, the highest level in three decades. Yet despite successive interest rate rises by the Bank of England, high street banks have failed to pass these increases on to savers.

As a result, the average easy-access cash Isa pays just 0.3pc, according to Moneyfacts, an analyst. A sum of £10,000 saved in this account would be worth just £9,507 in real terms after one year at the current rate of inflation – a loss of £493.

This is the equivalent of losing £41 a month and is £122 less than the overall purchasing power eaten by inflation over the whole of the past decade, when a £10,000 deposit would have effectively lost £615.

Those who took a chance on the stock market instead would have seen significantly better returns over this period.

A saver using their entire cash Isa allowance would have saved £142,220 over the past 10 years, but would have just £132,663 to show for it today in real terms, according to AJ Bell, a stockbroker. If the same saver had chosen to invest their cash in the average global stocks and shares Isa instead, the same sum would be worth £228,564 today – a return of 61pc.

AJ Bell’s Laith Khalaf said: “Stocks and shares Isa investors have been big winners from the past decade. Over any 10-year period, the odds are heavily stacked in favour of a stock investor compared with a cash saver, but the loose monetary policy of the past decade has helped exacerbate that trend.”

Shopping around for the best deal will have little impact. The best cash Isa rate currently offered is from Shawbrook Bank at 0.66pc, some 0.4 percentage points higher than the market average.

Even this best-buy deal would lose £38 a month in real terms at the current rate of inflation if a customer deposited £10,000.

Recent Bank of England data suggest people are wising up to the pitfalls of these paltry rates. Savers pulled more than £7bn from cash Isa accounts in the second half of last year, the largest outflow since the deals were launched 23 years ago.

This was 46pc more than the amount withdrawn in the final six months of the previous year, according to AJ Bell. Over the same period, savers deposited £35.5bn into non-cash Isa accounts.

The broker’s Laura Suter said the personal savings allowance, combined with low interest rates, had wiped out the benefit of cash Isas for most savers.

The allowance means basic-rate taxpayers can earn £1,000 a year in savings interest before they have to pay tax. Higher-rate payers can earn £500 before tax is due.

The average non-isa easy-access savings account offers interest of 0.25pc. A basic-rate taxpayer would have to save £400,000 before tax was due. Higher-rate payers would have to save £200,000.

In reality the average cash Isa holder has just £5,024 saved, according to the most recently available Government statistics.

Ms Suter added that rates could improve over the coming months. Experts expect the Bank of England to raise Bank Rate at least twice more this year, possibly to 1.25pc, in an attempt to tackle surging inflation.

“This means that the interest rates on offer for cash savers will rise too,” Ms Suter said. “More people will start to hit their personal savings allowance as a result, and so a cash Isa will become more appealing.”