Savers still suffering real term losses as average Cash ISA rates fail to limit damage of inflation - report

Despite much higher interest rates, the real returns on cash ISAs are still causing savers to suffer due to rampant inflation.

According to analysis from Quilter, cash ISA savers are realising a more than 5 per cent loss on their savings over the last 12 years due to the gap between savings rates and inflation.

While this still represents a significant loss, the picture has improved from the end of last year when savers were suffering near double digit losses.

When CPI inflation hit 11.1 per cent in the 12 months to October 2022, the monthly interest rates available on cash ISA deposits, including unconditional bonuses, stood at just 1.69 per cent, meaning cash ISA savers suffered a real terms loss of 9.41 per cent.

While the average cash ISA rate is now 2.62 per cent according to the Bank of England there are much more competitive rates on the market with the current best easy access cash ISA coming in at 4.05 per cent and a two-year fixed rate of 5.25 per cent.

Quilter is warning cash savers to mind the inflation gap and calling for cash ISAs to have additional risk warnings in times of high inflation so that people fully understand how their capital will be eroded in real terms.

Someone who invested £10,000 in a cash ISA in January 2011 would currently have £11,472.09. Adjusted for inflation, this is just £8,041.

In contrast, a £10,000 investment in a stocks and shares ISA, held in the IA Global Equity index over the same period would be worth £26,956 or £18,901 after inflation. These figures do not account for charges that may reduce the final sum.

Rachael Griffin (pictured), tax and financial planning expert from Quilter, commented: “With inflation remaining stubbornly high and the Bank of England raising interest rates to 5 per cent savers should be seeing greater returns from their cash. However, many banks and building societies while quick to pass on mortgage rate increases are yet to up their rates on products such as Cash ISAs.

“Although the picture has improved in certain corners of the market even savers on the very best rates will be realising a real terms 3 per cent loss. Although Cash ISAs have been perceived for a long time, been an easy way to save money with comparatively little risk they still get ravaged by the impact of inflation. But now with inflation hitting 30-year highs and interest rates on cash savings still lacklustre, the time may have come for people to consider alternatives.

“If you won't be needing the money in the next few years, investing could help make your cash work harder, and has a better chance of delivering an above-inflation level of return over the length of the investment although there are still risks associated investing too.

“A good rule of thumb is to save three to six months of your salary in cash and then invest in a spread of different assets that can deliver a long-term return. But everyone's circumstances are different, which is why it's important to seek personal financial advice.”