Time to consider alternatives amid high inflation and lacklustre rates on cash savings

Griffin says that despite much higher interest rates, the real returns on cash Isas were still causing savers to suffer due to rampant inflation.

According to analysis from Quilter, cash Isa savers have been realising a more than 5 per cent loss on their savings over the past 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, she added. 

When consumer price index 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. Even in March 2023, savers bore an 8.15 per cent real-terms loss.

July 2022 marked the highest loss in more than a decade when savers faced a decline of 9.42 per cent – more than triple the previous highest loss (-2.81 per cent in November 2017).

Griffin says: “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 cash Isas have been perceived for a long time as 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 tax-efficiently with alternative investments can also help in reducing inheritance tax liabilities.

Shaun Robson, head of wealth planning at Killik & Co, says that while alternative investment market shares were often overlooked as an investment option – as some of the companies qualify for business relief – it is something to consider when it comes to IHT. 

Robson adds: “Due to the relief, an IHT saving of 40 per cent on the portfolio value of qualifying shares can be made if they’ve been held for at least two years.

“If you are contemplating this, it is important to note investments can go up as well as down, and to seek advice to ensure this is the right way to reduce your IHT liability.”