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Three million cash Isa pensioners hit by inflation

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The savings of millions of pensioners are at risk from inflation due to holding Isa portfolios purely in cash, according to new data from HM Revenue & Customs.

The information from a Freedom of Information request filed by Sir Steve Webb, former pensions minister and partner at London pension consultants Lane Clark & Peacock, reveals the risk which spiking inflation poses to older savers.

“These figures show that huge amounts of money are sitting rotting in cash Isas,” said Webb. “With inflation soaring, the spending power of cash savings is being savagely reduced.”

Of the nearly 6m people aged 65 and over who hold individual savings accounts (Isas), more than 3m only hold cash. The total pot held by this age group is £300bn, including £87bn by those holding only cash, with an average pot of roughly £52,500.

Cash Isas can be convenient for some activities, said Helen Morrissey, senior pensions and investments analyst at Hargreaves Lansdown. “Keeping some part of your retirement savings in cash is a good idea — for instance keeping between one and three years’ worth of essential expenses in an easy-to-access account means you can meet your daily needs while making sure the rest of your money is working as hard as it can.”

But even fixed-term cash Isas, which typically offer better deals than their instant-access counterparts, are unlikely to offer rates higher than 1 per cent, despite last year’s rate increase by the Bank of England.

“We’ve had a decade or so of really benign inflation conditions,” said Tom Selby, head of retirement policy at investment platform AJ Bell. “People who have just shoved money into a cash account and aren’t thinking about inflation will get a shock in 10 to 15 years time.”

UK inflation rose to 5.4 per cent in the year to December, above economists’ forecasts and its highest rate for 30 years.

“We are seeing the price of gas and electricity bills increase by a much larger margin,” added Morrissey. The UK is exploring a radical intervention in the power market in order to protect consumers.

Selby said that investors should consider growing life expectancy when it comes to the nature of their investments. “If you’re in your late 60s or even early 70s, your investment time horizon might well be 25 to 30 years,” he said. “If you’re in that position, you should consider investing your money, taking into account the balance of risks and goals.”

Even those looking at shorter-term investments might be better off looking at other cash products such as fixed rate bonds, he said, since they might offer a better hedge against inflation.

Data from investment platform Interactive Investor, released last March, showed that outflows from cash Isas into stocks and shares Isas — which have proved a more resilient hedge against inflation — increased in 2020 compared with 2019.

“A key benefit of Isas is that you are not subject to tax on income or growth,” said Amy Pethers, adviser at wealth manager Brewin Dolphin. “You are therefore limiting the impact of those benefits if you hold cash in your Isa due to the low returns in this low interest rate environment.”



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