Inflation costing cash ISA savers £1.6 billion

With inflation continuing to hover above the Bank of England's target and showing little sign of easing after today's announcement that CPI dropped 0.20 per cent to 3.2 per cent and RPI dropped 0.10 per cent to 5 per cent, savers should be aware of the impact this is having on their ISA savings.

Analysis from moneysupermarket.com shows that since January 2010, based on the RPI a saver with an average ISA pot of £8,171 would have seen its value depreciate by up to £89.13, with the nation as a whole losing out on a collective £1.6 billion.

To counter the eroding effect of inflation, ISA savers will now need an account paying at least 5.01 per cent (RPI) 3.21 per cent (CPI) to gain benefit in real terms from their savings.

Providers aren't helping the situation either as the average easy access ISA rate has fallen from 1.44 per cent in April 2010 to 1.38 per cent currently. Out of the 93 accounts for balances at £5,100, not one pays enough interest to offset the effects of inflation. The top account currently offers an interest rate of 2.75 per cent.

Kevin Mountford, head of banking at moneysupermarket.com, said: "There's no denying that current inflation figures and low interest rates are having huge impact on customers savings. There is a danger that many will do nothing because of the belief that there is little point, but this is not the time to be apathetic. Yes, it's getting harder to earn a positive return on your savings, but rather than sitting back and doing nothing, it is more important than ever for savers to proactively seek the best returns possible on their money."

"Given the low number of products which offer a return above inflation, savers really need to keep a close eye on their interest rates, especially on accounts which include bonus rates and the rate is likely to come crashing down after the term ends. There are things you can do to limit the impact on savings. It's a no-brainer to utilise your tax free Cash ISA allowance of £5,100, and with an overall ISA allowance of £10,200 per tax year, stocks and shares ISAs may also be an option for some savers."