Investments  

Cash Isa savers see fastest wealth erosion rate in 40 years

Cash Isa savers see fastest wealth erosion rate in 40 years

UK savers storing money in cash Isas are experiencing wealth erosion at the fastest rate in more than 40 years as inflation outpaces interest rate returns.

Savers are losing out on £26.7bn in interest payments when compared to the current rate of inflation which sits at a 41-year high of 11.1 per cent, Bowmore Asset Management has said. 

The current average interest rate for all open cash Isas sits at 1.74 per cent, meaning that savers are earning only £5bn in interest.

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Bowmore pointed out this is “only a small fraction” of the £31.7bn in interest payments that savers would need to keep pace with inflation. 

In total, £285.5bn is currently invested in cash Isas in the UK. 

“Cash has long been regarded as a poor option for savers during periods of high inflation and this time is no different,” Bowmore client director Charles Incledon said. 

“A more sensible alternative is to diversify what they own and invest some of their money into shares. A stocks and shares Isa provides the benefit of tax-free investing with the current Isa allowance enabling investors to top up an Isa by up to £20,000 a year.”

Inflation hedging

According to the asset manager, savers should look to areas of the economy that actually benefit from periods of high inflation, such as energy companies and major banks which benefit from interest rate rises.

Investments either directly or indirectly in these sectors has been referred to as inflation trades or inflation hedges.

Bowmore noted that over the long-term, the stock market has provided a return significantly above the rate of inflation.

For example, the FTSE 100 has increased by 535.8 per cent over the last 38 years, comfortably ahead of the inflation rate for the same period.

Despite the Bank of England’s decision to increase interest rates to 3 per cent earlier this month in an effort to control inflation, the rates on savings accounts and cash Isas still lags significantly behind the Bank’s base rate.

Although investors may be concerned about the performance of the stock market over the last year, Incledon pointed out that opportunities currently exist that were not there a year ago.

“Whilst many investors still have concerns about investing in the stock markets following a sustained period of downwards pressure, the markets currently represent a significant discount when compared to 12 months ago,” he said. 

“In other words, you can now buy stocks and shares at a much lower price."

“It is important to remember that good companies do not become bad companies overnight, and companies that were well positioned to weather the current economic storm offer investors significant opportunities when investor sentiment improves, and share prices rebound,” Incledon explained.

jane.matthews@ft.com