Cash ISAs are one of the most popular savings products in the UK. At the end of the 2017-18 financial year, the market value of cash ISAs stood at just under £270bn, representing 44% of the funds held across all the different types of adult ISAs. Moreover, during that year, the share of cash ISA subscriptions as a proportion of all ISA subscriptions was a high 72%. Clearly, many Britons like the security of holding cash savings within an ISA account and using the product as their main savings vehicle.
Yet if you hold a considerable amount of money within a cash ISA, or any basic savings account for that matter, there’s something you should know: inflation is destroying the value of your money.
The invisible wealth destroyer
As we know, inflation refers to the gradual increase in prices of goods and services over time. You don’t notice it on a day-to-day basis, but over time, it can impact your wealth significantly if you’re not protected from it.
This week, it was reported that the UK inflation rate unexpectedly rose to 2.7% in August – the highest level in six months. That’s not good for UK savers at all.
Cash savers are going backwards
The problem here is that those invested in cash ISAs or basic savings accounts are simply not protected from inflation.
If an inflation rate of 2.7% was to persist for 10 years, goods and services would be approximately 30% more expensive in a decade’s time. Yet money saved in a Cash ISA or a savings account would not have kept up.
Indeed, according to recent research from Moneyfacts, only four savings accounts across the whole of the UK currently pay a higher rate than the most recent inflation figure of 2.7%, with four of those accounts requiring savers to lock their money up for between five and seven years. Shockingly, the average easy-access savings account pays a low 0.6%.
Ultimately, this means that the vast majority of individuals and families who prudently put money away on a regular basis into a cash ISA or a savings account are actually getting poorer every year, in ‘real’ terms.
Protect yourself
To protect yourself from inflation, and stop the value of your savings being eroded over time, it’s essential to have your money growing at a rate that is higher than inflation. So, what’s the best way to do that?
One straightforward solution is to invest some of your money in the stock market for the long term. While stocks are riskier than cash because share prices move up and down constantly, over the long term, stotheyks generally provide investors with much higher returns than cash savings do.
For example, consider the FTSE 100 index – the index of the largest 100 companies in the UK. This generated returns of just under 75% for the 10 years to the end of 2017 – a return far higher than inflation. In comparison, had you been invested in cash over that time, you may have only made 10%-15% on your money.
Of course, there’s no guarantee that stocks will provide the same kind of investment returns over the next decade. Yet with inflation destroying the value of cash savings, it certainly makes sense to consider allocating some of your money to stocks for long-term, inflation-beating growth.
