Three million cash Isa pensioners are affected by inflation

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

Information from a freedom of information request filed by Sir Steve Webb, former pensions secretary and partner at London pensions advisers Lane Clark & ​​Peacock, highlights the risk that rising inflation poses to older savers.

“These numbers show that huge amounts of money are rotting away in cash, Isas,” Webb said. “With inflation rising, the purchasing power of cash savings is being drastically reduced.”

Of the nearly 6 million people age 65 and older who have Individual Savings Accounts (ISAs), more than 3 million hold only cash. The total pot held by this age group is £300bn, including £87bn from those holding cash only, with an average pot of around £52,500.

Cash isas can be convenient for some activities, said Helen Morrissey, senior pensions and investments analyst at Hargreaves Lansdown. “It’s a good idea to keep some of your retirement savings in cash – for example, you can keep important expenses between one and three years in an easy-to-access account so you can meet your day-to-day needs while securing the rest of the money that works as hard as you do.” it can.”

But even fixed-term ISAs, which typically offer better deals than their instant-access counterparts, are unlikely to offer rates higher than 1 percent, despite the Bank of England’s rate hike last year.

“We’ve had really benign inflation conditions for about a decade,” said Tom Selby, head of pension policy at investment platform AJ Bell. “People who just put money in a checking account and aren’t thinking about inflation are going to get a shock in 10 to 15 years.”

UK inflation rose to 5.4 percent in December, beating economists’ forecasts and a 30-year high.

“We’re seeing gas and electricity bill prices going up a lot more,” Morrissey added. Britain is considering a radical intervention in the electricity market to protect consumers.

Selby said investors should consider increasing life expectancy in the nature of their investments. “If you’re in your late 60s or even early 70s, your investment horizon could well be 25 to 30 years,” he said. “If you’re in this position, you should consider investing your money with a balance of risk and goals in mind.”

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

Data from investment platform Interactive Investor, released last March, showed that cash Isa outflows into equity Isa – which have proven to be a more resilient hedge against inflation – increased in 2020 compared to 2019.

“A key advantage of Isas is that you’re not subject to any income or growth taxes,” said Amy Pethers, a consultant at wealth manager Brewin Dolphin. “You are therefore limiting the impact of those benefits by holding cash in your Isa because of the low yields in this low interest rate environment.”

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