Call for Isa allowance hike to mitigate inflation corrosion

Daniel Harrison, partner at True Potential, has called on the government to hike the limit on Isa savings to £25,000 a year in order to prevent savings being eroded by persistent above-target inflation.

The consumer prices index measure of inflation grew by 2.8 per cent in July, down from a 14-month high of 2.9 per cent in June, data released yesterday (13 August) by the Office for National Statistics revealed.

However, the July figure means inflation has stood above the Bank of England’s central target of 2 per cent for the 44th consecutive month.

Article continues after advert

The largest contributions to the modest fall in the rate came from air fares, plus price movements in the recreation and culture, and clothing and footwear sectors.

Daniel Harrison, senior partner at financial services firm True Potential, added that British savers with money in cash Isas have “been hit hard” for years, with a combination of low interest rates, high inflation and policies such as quantitative easing and Funding for Lending.

He said: “This is something which is contributing to the current savings gap in the UK, meaning many British people do not have enough money to fund their retirement.

“The news on inflation, which comes a week after the Bank of England’s commitment to retain low interest rates for years to come, underlines the importance of investments that beat inflation.

“If the stocks and shares Isa allowance were to be increased to £25,000 per annum, per person, investors’ money could grow in real terms tax-free until they retire.”

Scott Corfe, senior economist for the Centre for Economics and Business Research, said he expects inflation to fall back at the end of of this year and into 2014, reaching close to the Bank of England’s central target.

“We expect inflation on the CPI measure to average 2.2 per cent next year. Cooling global commodity prices should provide respite to UK households and curb price growth, helping to abate ongoing cost of living pressures.

“However, with annual earnings growth languishing below the 2 per cent mark, where we expect it to remain until 2015, households will still be seeing their spending power eroded for some time.”

Hargreaves Lansdown warned that the long-term effects of inflation on savings “are huge”. It said if inflation remained at 2.8 per cent it would take a little over 25 years to “halve the value of your savings”.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, said: “Since the financial crisis, inflation has remained persistently above the 2 per cent target set by the government.

“The Bank of England has forecast interest rates may remain low until 2016. If this is the case, savers can expect interest on their savings to remain below inflation for another three years.

“Inflation also affects our real income. With wages frozen, household incomes are being eaten away by inflation. Inflation matters to all of us, whether we are working or retired, savers or investors as it measures the rate at which the costs of goods and services rise.”