Cash ISA savers are losing money as inflation erodes the value of their savings, new analysis has revealed.
Following a brief period of seven months where returns on cash ISAs beat inflation, they are back into negative territory, according to the analysis from Quilter.
With CPI inflation hitting 3% in the 12 months to January 2025, and the monthly interest rates available on cash ISA deposits dropping to 1.77%, cash ISA savers face a real term loss of 1.23%.
January is the third month in a row where savers suffered a real terms loss on cash ISA savings since March 2024.
Quilter warned that the trend is likely to continue. Inflation may increase slightly again and expectations are that the Bank of England will cut interest rates at least twice in 2025, widening the gulf further.
As a result, the wealth manager is urging savers to consider a stocks and shares ISA in the new tax year, given they have a better chance of keeping pace with inflation.
According to its analysis, someone who invested £10,000 in a cash ISA in December 2012 would currently have £11,955. Adjusted for inflation, this is just £7,918. In contrast, a £10,000 investment in the IA Global Equity Index over the same period would be worth £33,526 or £22,221 after inflation.
Holly Tomlinson, financial planner at Quilter, said: “Following a relatively rare period of cash ISAs delivering above inflation returns we are now back to people losing money in real terms by keeping their money in cash.
“Rumours have been swirling that the Government might scrap or scale back cash ISAs, which would be a clear push to shift the UK’s savings culture towards investment. That’s not necessarily a bad thing as too much wealth sits in low-yielding cash when long-term investing could deliver better returns and fuel economic growth.”
Tomlinson said that while the Government needs to address the UK’s love affair with cash, the approach should be reform, not removal.
“Capping tax-free cash savings or improving incentives for investment ISAs could strike the right balance. The UK does need to boost its investment culture but that shouldn’t come at the expense of savers who rely on cash for stability,” she added.
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