Despite the low interest rates on offer from cash ISAs, statistics show that many people in the UK continue to save their money in these products.
For example, according to HMRC, in the 2017/18 financial year 75% of all ISA contributions went into cash vaieties. Moreover, of the £608bn saved across all ISA products at the end of the 2017/18 financial year, 44% was saved this way.
There’s no doubt that theydo offer savers some advantages. For instance, any income generated within a cash ISA is tax-free. That’s a big plus, especially if you have a substantial amount of money saved in an ISA. Also, money saved within a cash product is secure so you’re not going to lose your savings.
However, if you’re using one as a retirement savings vehicle, you need to be aware that because interest rates remain abysmally low, your money could be losing value in real-life spending terms over time. As such, your retirement could potentially be at risk.
Inflation can destroy your wealth
The reason I say this is that even the best cash ISA rates right now are below the rate of inflation (the rise in the prices of goods and services over time). What that means is that money saved in a cash product is potentially losing purchasing power as the years go by. In real-life spending terms, it’s becoming less valuable.
For example, over the last six months, UK inflation has averaged around 2.28% per year, meaning that goods and services have risen at that annualised pace per year. In contrast, the best cash ISA rate currently is around 1.45%, according to Money Saving Expert (and that rate comes with restrictive conditions too).
This means that even if money is held in a such an ISA offering the best interest rate, it’s still not growing as fast as the general rise in prices of goods and services across the UK. Essentially, it’s losing its real-life purchasing power by around 0.8% per year.
Leaving money in that particular savings vehicle for a period of 10 or 20 years could therefore have devastating consequences. You could potentially reach retirement, only to discover that your money doesn’t buy as much as it does today.
How to grow your money faster than inflation
To avoid losing spending power over time, it’s important that your money grows at a rate that is above inflation. And one of the easiest ways to do this is to allocate some of your money to growth assets such as shares.
Shares are higher risk than cash savings, yet at the same time, they tend to provide much higher returns (around 7% to 10% per year on average over the long term) meaning that money invested in shares tends to grow at a rate above inflation over time.
Growing your money at 7% to 10% per year, as opposed to 1.45% per year through a cash ISA could make a big difference to your retirement savings over the long term.
These days, it’s easier than ever to get started with investing. Opening a stocks and shares ISA is a good place to start. If you’re looking to learn more about how to grow your money through stocks, you have come to the right place.