Does an ISA beat inflation?

Written by
Eszter Z.
Fact checked by
Adam N.
Updated
Feb 2023

ISAs, Individual Savings Accounts, have been a great way of growing your savings tax-free. However, with soaring inflation and interest rates lagging behind, it is questionable whether such savings can beat inflation. You could consider putting your money in different or several savings or investment vehicles to shield it from inflation. 

ISAs might not be able to beat inflation (especially not cash ISAs), but here are a few tips on how to fight inflation when you are already holding an ISA. 

THE ESSENCE

  • Maximizing your ISA annual allowance of £20,000 is more important than ever
  • Consider switching from cash ISA to stocks and shares ISA
  • Alternatively, you can diversify your ISA portfolio, and hold cash as well as a stocks and shares ISA account

Is it worth putting money in an ISA?

In December 2022, UK inflation was at 10.5% and the Bank of England raised the interest rates to 4%, the highest level for 14 years. But rates on savings and cash ISAs are lagging behind. However, the Bank of England recently said that it expects inflation to fall this year. It expects inflation to begin to fall from the middle of this year and be around 4% by the end of the year. 

However, currently, high inflation is eating into cash savings and poses a challenge to finding the right investment to shield you from the negative effects of inflation. The two financial instruments you should avoid in a high inflation environment are cash and fixed-rate debt instruments, such as fixed-rate bonds. So if you are worried about inflation, you might want to consider opening a stocks and shares ISA instead of a cash ISA. If you already have a cash ISA, you might want to diversify by opening a shares or stocks ISA. 

Currently, the highest rate of the easy-access cash ISAs pays a little over 3%, and fixed-rate ISAs (where you hold down your money for a period of time), give an average of 4.24%, according to Moneyfacts, which has been collecting data on the UK retail financial industry. 

Cash ISAs have been eroding due to rising inflation. However, consumers want to keep large sums of cash accessible in such uncertain times, so they have been reluctant to seek other saving or investment options. UK data shows that people continue to favour cash ISAs over stocks and shares ISAs.

If you consider transferring your ISA, here's how you can do it

Stocks and shares ISAs are a bit riskier, as you are not just putting down your cash in a savings account but you invest in companies. Nevertheless, stocks and shares ISAs have been outperforming cash ISAs, according to UK financial data. And remember, you don’t pay tax on dividends from investments held inside an ISA.

The average stocks and shares ISA fund returned 6.92% between February 2021 and February 2022, according to Moneyfacts. In contrast, the average cash ISA rate returned 0.51% between February 2021 and February 2022. 

Stocks and shares ISAs might be riskier, but they are regulated by the UK's  Financial Conduct Authority (FCA), and your investments are protected by the UK’s Financial Services Compensation Scheme (FSCS) up to £85,000 per financial provider. Some providers may charge you to change your investments or withdraw money. Withdrawals should typically take between three and seven days unless your investments first need to be sold to have the cash to withdraw, which might take longer. 

 

To find the Best stocks and shares ISA provider, here are our top 5 recommendations. 

 

If you are worried about the effects of inflation, we have put together a guide on how best you can shield your investments. 

If you plan to diversify your ISA portfolio, note that you can accumulate several ISA accounts, here’s how. If you are unfamiliar with the different types of ISA, you can read about them here more. Our expert team has done all the work for you and reviewed brokers based on BrokerChooser's unique methodology.

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Author of this article

Eszter Zalán
Eszter Zalán

Eszter is a former Editor and Financial Journalist for BrokerChooser. She wrote and edited BrokerChooser's content from 2021 onwards, bringing her more than a decade-long experience in journalism to the team. She has covered world affairs and several financial crises, and dove deep into SEO and coding to make BrokerChooser's content more accessible to users.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology.

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