Savers can get better ISA returns with top providers – but many have cash in accounts paying small amounts of interest
Many savers with cash ISAs are losing money in real terms as inflation is greater than the interest they are getting, analysis shows.
Inflation rose to 3 per cent in the year to January, according to figures released on Wednesday.
But Bank of England numbers show that the average cash ISA deposit in January was yielding just 1.77 per cent.
This is the third month in a row that average ISA deposits have been below inflation, meaning savers are seeing their cash chipped away in real terms.
The gap was at its biggest in late 2022, when ISA deposits were getting less than 2 per cent interest, but inflation was above 10 per cent for a period of time, peaking at 11.1 per cent in October of that year.
It comes as the Treasury considers the possibility of scrapping or limiting cash ISAs in a bid to encourage Britons to put more money into investments like the stock market.
Experts say people can get far better returns by shopping around, with some cash ISAs still paying more than 5 per cent interest, despite a cut to the base rate.
And savers could get even better returns by investing in stocks and shares ISAs, though there is also a risk of losing money.
Wealth management firm Quilter has warned customers that with inflation set to grow later this year, the real-terms losses savers will make could grow.
Holly Tomlinson, financial planner at Quilter, said: “Following a relatively rare period of cash ISAs delivering above inflation returns we are now back to people losing money in real terms by keeping their money in cash.
“While this data shows that cash ISAs are not the best place to save to get the best returns, these types of accounts still have their place. Your saving goal might be in the short term meaning you can’t take on the inherent risk that comes with investing.”
Currently it is possible to put £20,000 a year into an ISA with all subsequent interest free of tax.
Usually, savers pay tax at their marginal rate after earning over a certain limit – £1,000 a year if they are a basic rate taxpayer, £500 if they are a higher rate payer, and £0 if they are an additional rate payer.
The two main types are cash ISAs and stocks and shares ISAs, which must be put into the stock market or similar investment vehicles – making more profit over time but also coming with more volatility.
But the Government has repeatedly refused to rule out putting new curbs on the cash form of the ISA.
Best cash ISA rates
Easy-access – Trading 212 (5.03 per cent)
One-year fix – OakNorth Bank (4.46 per cent)
Two-year fix – Secure Trust Bank (4.41 per cent)
Ministers are set to hold talks with investment firms in the coming months to discuss how to encourage more people to use their savings in a way that generates economic growth and higher returns for the saver, The i Paper understands.
No decisions on possible policy changes have been made and nothing is expected to be announced before the next Budget in the autumn, with any changes likely to take effect from April 2026.
A Treasury spokesman said in response: “We want to help people save for their future goals and build greater financial resilience across the country. We keep all aspects of savings policy under review.”
However, building societies and banks have spoken out against making changes to the cash ISA.
Chris Irwin, director of savings at Yorkshire Building Society, said removing cash ISAs as an option for savers would “have detrimental impacts on the financial well-being of many, along with increasing their tax liability”.
