Pensioners losing billions in cash ISAs due to rising inflation

As we approach the end of the tax year, the time of year many savers would rush to maximise their cash ISA allowance, a new report following a freedom of information request, shows that cash ISAs are losing savers billions due to inflation hitting a 30-year high.*

What is an ISA?

An ISA, or Individual Savings Account, allows UK residents and Crown employees to hold cash, shares and unit trusts free of tax on dividends, interest, and capital gains. Essentially, it’s an account that you don’t pay tax on.

A cash ISA is generally considered the ’safest’ ISA, as unlike a stocks and shares ISA, the value of your cash can’t go down and therefore, in theory, there is no risk of getting back less than you put in, whereas stocks and shares can fluctuate in value. Currently you can save up to £20,000 per person, per tax year with all interest free of tax. So, when the value of your cash ISA increases, you get to keep all of it, with none going to the tax man.

Why are pensioners losing money?

A recent freedom of information request from LCP showed that of the 5.8 million over 65s holding ISAs, over 3.4 million hold their ISA in cash. With the current best cash ISA rate at just 1.85% AER (locked in for 5 years) compared to the current rate of inflation at 5.50%, ISA savers are being hammered with the effects of rising inflation. 

Pensioners are being especially hit as they tend to hold twice as much in cash ISAs compared to the under 65s, with figures showing that over 65s are holding an average balance of £25,383 in cash ISAs, totalling £87billion that is currently being crushed by inflation. Compare this to the under 65s who have savings of on average, £16,069 for 55 to 64 down to £4,365 for the under 25s in cash ISAs.

It’s simple - if the rate of inflation is higher than the interest rate on your cash ISA, effectively you’re losing money in real terms, as the value of your money buys you less. Even if you could find a cash ISA that offers as high of a rate as inflation, you will still only be breaking even. But currently there is nothing that comes even close. 

How could this affect me?

If you have more than £50,000 in your cash ISAs, then the impact could be significantly higher. If you are earning the current best 1-year cash ISA rate of 1.10%, according to Savings Champion although the balance including accrued interest would be £50,550 at the end of the term, if inflation were to remain at its current level of 5.5%, the real value after the effect of inflation would be £47,915, leaving the new balance with more than £2,600 less in spending power. 

Have a go at our inflation calculator to find out exactly how much you could be affected.

At TPO, we understand the importance of inflation proofing your savings and investments where possible, to ensure you get the outcome you need for a comfortable lifestyle.  If you’d like to find out more about how we can help with your future financial plans why not get in touch for a free non-committal initial consultation. We’re currently offering those with £100,000 or more in savings, pensions or investments a free retirement review worth £500.

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