AJ BELL PLC - The average ISA balance paid just 0.8% in 2023, according to figures released by the Bank of England today
- £1,000 in the average cash ISA at the beginning of 2022 would now be worth £912 after adjusting for inflation (CPI)
- Things are looking better in 2023, but returns are still likely to be below the rate of inflation
- The gap between 1 year fixed rate and variable rate cash ISAs sits at 12 year highs
Laith Khalaf, head of investment analysis at AJ Bell:
"2022 was a terrible year to be holding cash, even though interest rates climbed to heights not seen since the global financial crisis. Cash ISA rates were slow to pick up, and inflation hit double digits across the year as a whole. The result is that £1,000 held in the typical Cash ISA at the beginning of 2022 would now be worth just £912 in real terms, after paying just 0.8% in interest over the course of the year. Savers who opted for more competitive accounts would have done better, but none would have kept pace with the searing 10.5% rise in the CPI index in 2022.
"Things are looking better for cash savers as we enter 2023. The typical Cash ISA is now paying 1.6% per annum and that's likely to tick upwards as interest rates rise and average savings accounts gradually get dragged into the new higher interest rate world. However, even if inflation halves to around 5%, as targeted by the Prime Minister, cash savers are still likely to see a fall in the buying power of their money in 2023, though not by anywhere near the same margin as last year. We're soon due to be furnished with fresh inflation forecasts from the Bank of England and the OBR. The November forecast from the OBR estimated CPI inflation would be 7.4% in 2023, still significantly higher than anything a cash account is going to deliver, barring an extraordinary rate-hiking spree from the Bank of England, or a collapse in inflationary pressures, which seems more likely.
"There is also a wide range of cash rates available on the market, so savers would do well to pay attention and shop around to make the most of their savings. While the average cash ISA balance is now receiving 1.6% per annum, the best variable rate Cash ISA is offering 3%, according to Moneyfacts. As well as a substantial shortfall between the best rate and the average rate, there is also a big gulf between fixed rates and variable rates. Little wonder then that in December, savers withdrew £1.3 billion from instant access accounts, and ploughed £6.9 billion into time deposits, where their money is locked away for a set period (figures also released by the Bank of England today). As the chart below shows, over the last year the wedge between 1 year fixed rate and variable rate Cash ISAs has climbed to its highest level since 2011, when this Bank of England data series started.
Source: Bank of England
"While 1 year fixed rates won't benefit from increases in interest rates in 2023, in order to match their return, variable rates not only have to rise to the same level, but also some way beyond, in order to make up for lower interest paid while they get there. It's little surprise then that savers are plumping for fixed rates for their cash.
"The stock market had a mixed year in 2022, with the S&P 500 slumping and the FTSE 100 returning 4.7%, still well below the rate of inflation, but better than a slap in the face. Of course, returns from the stock market are not guaranteed, and losses can be incurred, so savers might now be wondering why they should take the extra risk. That's a more lively debate than it has been for many years when cash rates were close to zero, and certainly anyone who needs access to their money in the next twelve months shouldn't consider the stock market. But over the longer term stocks have historically returned more than cash, through a combination of dividends and rising share prices, so if you're squirrelling money away for five to ten years or more, the stock market is statistically a better bet. The Barclays Equity Gilt Study analyses returns stretching back to 1899, and has found shares have beaten cash 91% of the time over a ten year period.
"You should always aim to have 3 to 6 months of expenses in cash, though, just to tide you over in case of an emergency. As everyone knows, humans have different tummies for broccoli and ice cream, and it is much the same with cash and stocks. These two asset classes fit two very different purposes, one for short term savings and one for long term investment, and so they can happily be digested in tandem."
Laith Khalaf started his career in 2001, after studying philosophy at Cambridge University. He's worked in a variety of roles across pensions and investments, covering both the DIY and the advised sides of the business. In 2007, he began to focus on research and analysis, and has since become a leading industry commentator, as well as a regular contributor to the financial pages of the national press. He's a frequent guest on TV and radio, and for several years provided daily business bulletins on LBC.
Contact detailsMobile: 07936 963 267
Email: laith.khalaf@ajbell.co.uk
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AJ Bell plc published this content on 31 January 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 February 2023 11:47:08 UTC.
