Britons to lose £8bn as inflation runs rampant

·3 min read
Illo about inflation: balloon with pound sign
Illo about inflation: balloon with pound sign

Millions of British savers will lose a collective £7.8bn to inflation this year after leaving their money in cash Isas, where it is vulnerable to rising prices.

Inflation has surged to 5.4pc, its highest level since the early 1990s, triggering a cost of living crisis that is quickly eroding any savings left in cash.

More than 14 million people have an average of £12,442 in cash Isas, a Freedom of Information request has shown. These accounts typically pay an interest rate of less than 1pc, which means at least 4.4pc of the real value will be wiped away, eating into the saver’s spending power.

The average person will lose £547 this year. Nearly a million people have more than £50,000 in their cash Isas, which means they will be worse off by a minimum of £2,200.

Pensioners are especially vulnerable to the damaging effects of inflation. Over-65s will take a £3.8bn hit this year alone, as they typically have twice as much in cash Isas as their younger peers.

Inflation will knock £1,100 off the real value of their average £25,383 balance, according to calculations by consultancy LCP, which submitted the Freedom of Information request. This assumes an interest rate of 1pc.

But some instant-access cash Isas pay close to zero, including the NatWest cash Isa, which has a 0.01pc interest rate on savings of less than £50,000. Barclays pays 0.05pc on up to £30,000.

Sir Steve Webb, a former pensions minister and now a partner at LCP, warned that huge amounts of money were “sitting rotting” in cash Isas.

“Inflation is like a tax on savers,” he said. “Pensioners need to consider urgently whether keeping their money in these cash accounts is the best way to protect their savings, especially when the real value of their state pension is also being squeezed.”

Retirees will be dealt a double blow after the Government broke its promise and suspended the earnings element of the state pension “triple lock”, which determines the increase in payments each year. In April the state pension will rise by 3.1pc, September’s inflation figure, which is far below the current rate.

At its current level, inflation will wipe £215 off pensioners’ yearly state pension income, which would amount to more than £5,000 by the time they reached age 85.

The higher the cost of living, the more pensioners will need to withdraw from their savings every year to keep up with rising prices. This means they risk exhausting their savings years earlier than they expected.

'Investing can generate higher returns'

Savers of all ages will be forced to take on more risk if they want their money to hold its value this year. Myron Jobson of Interactive Investor, an Isa provider, said those putting money aside for five or more years should assess their balance between cash and investments.

Investing in the stock market can generate higher returns to beat inflation. Those with a cash Isa can transfer their savings to a stocks and shares Isa without affecting their annual £20,000 allowance.

“Stock markets can be volatile and you have to be prepared for bumps, but they have a knack of delivering inflation-beating returns over long periods of time,” Mr Jobson said.

Jason Hollands of Bestinvest, an investment company, said buying bank shares would be more lucrative than saving in bank accounts. Banks bene­fit from rising interest rates because it allows them to widen the margin between what they earn from loans and what they pay on deposits. Shares in Barclays and Lloyds have climbed by 15pc in the past month, while Metro Bank shares have gained 19pc.

Low-cost funds that track the British stock market, such as the Fidelity Index UK fund, have high exposure to financial shares, as the London Stock Exchange is home to a large number of banks. Anyone looking for a “punchier” approach can put their money into the Artemis UK Select fund, which is one third invested in finance firms, Mr ­Hollands added.

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