OpinionMay 30 2018

Cash Isas and savings accounts should carry risk warnings

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Cash Isas and savings accounts should carry risk warnings
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Caveats that the value of your investment can go down as well as up are vital in ensuring investors are alive to the possibility that they could lose money.

So why aren’t similar warnings required for low interest rate cash Isas and savings accounts?

It’s our view that they should be.

After all, while investment products may fall in value there’s evidence that, thanks to rock bottom interest rates, the value of cash Isas is being destroyed in real terms.

Our research shows that last year, UK savers lost an eye-watering £32.5bn to inflation – despite interest rates rising for the first time in almost a decade.

It’s clear that what many people see as the ‘safe’ option is in fact anything but, as interest rates continue to languish at historic lows for the best part of a decade.

That’s because average savings rates were just 0.5 per cent over the year, while inflation stood at 3 per cent at the end of 2017 – wiping out any interest earned and eroding the value of capital at the same time.

I’m willing to bet that very few savers are aware just how much leaving cash in low interest accounts is actually costing them.

Some may even be blissfully unaware that their capital is decreasing in value at all.

It’s clear that what many people see as the ‘safe’ option is in fact anything but, as interest rates continue to languish at historic lows for the best part of a decade.

Over £150bn in savings is held in accounts that earn no interest whatsoever – something that urgently needs to stop.

This is exactly why we are calling for risk warnings to be made mandatory on cash savings products, just as they are on investment products – to alert savers to the realities of what might happen to the value of their capital if interest rates do undershoot inflation in such a big way.

This is especially important for those using cash Isas or savings accounts to build up a pot of capital for their retirement.

Over such a long-term timeframe, the pitfalls of an ‘excess of caution’ may well be exactly the wrong strategy to adopt, with the adverse effects exacerbated over time.

Risk warnings would act as a vital red flag to enable savers to make better informed decisions about what kind of product is actually right for them.

The time has come to take action. At easyMoney, we think some real clarity in the market is long overdue, as is some real choice.

Investors need products that offer real returns, and they need to be empowered to take a sensible, calculated approach to risk in order to achieve this. 

The fact that Innovative Finance ISAs (IFISAs) are now coming on the market is a welcome step forward in broadening people’s options.

Though IFISAs have a very different risk profile from traditional bank accounts, or Isa products which offer an £85,000 government guarantee, for those who are prepared to accept more risk for a higher potential return, they provide investors with a great alternative option.

Of course, savers will want to weigh up the pros and cons of different types of Isas and every individual’s risk appetite is different.

But it’s clear that there are significant drawbacks even with traditional savings accounts.

Some people may see the risk warnings on investment products and immediately be warned off – little knowing that their capital is also under threat if left languishing in a low or zero interest cash account. It’s vital that the playing field is levelled, and soon.

Andrew de Candole is chief executive of easyMoney