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What impact has the interest rate rise had on your ISA?

ISA, saving, money, cash, interest rate, inflation, stocks and shares ISA, cash ISA

Interest rates have been lifted off their record lows, but has this made the life of cash savers battling against inflation any easier? Here, we give you five tips to inflation-proof your ISA.

Ending a decade of record low interest rates, the Bank of England doubled the base rate to 0.5% at the end of 2017 in an attempt to unwind some of the momentum behind inflation.

Interest rates are used by Central Banks to try and keep the rate of price growth close to the government’s target – which is currently set at 2%.

Low interest rates encourage spending by making saving unattractive and borrowing cheap. The more people are willing to spend, the faster prices will rise.

To rein in aggressive inflation, Central Bankers will increase the base rate, which in theory makes borrowing to spend less attractive and saving more appealing.

Whilst global economies eye-up a return to a more normal, less-stimulative monetary policy landscape, the Bank of England has warned that any further tightening of interest rates will be slow and gradual – which is good news for borrowers who have binged on cheap money.

The question is whether this higher interest rate backdrop has fed through into the returns on savings accounts, or if the silent threat of inflation is eating into hard-earned savings.

Best savings accounts

Despite the 25 basis point rise to the Bank of England’s base rate, the best return you can get on an easy access cash ISA is just 1.16%, according to data from Money Saving Expert.

Whist many savers like to keep their savings flexible in case of an emergency, if you’re willing to lock your money up for a minimum of five years and have at least £2,000, the best return you can get stretches to 2.15%.

The Bank of England’s interest rate rise is dip-feeding into the returns offered on cash savings accounts. At the start of the new tax year, the best return on an easy access cash ISA was 1%.

Effects of inflation on your savings

If you’re money is growing in a savings account, what’s the problem? Well, whilst the number in your account might look like its inching higher, the value of your money is actually being eroded by inflation.

The pace of inflation slipped back to 3% in December, it’s first fall in six months, but the rate of price growth is still towering above the returns on cash savings account and is well-ahead of wage growth in the UK.

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Say you put £10,000 in a cash ISA earning you 1.16%, after 12 months your savings would have grown to £10,116.

If inflation stays at the current 3% level, the value of your £10,000 would have sunk to £9,700 without you realising it. That means you would need at least 3% just to offset the impact of inflation.

If you want to see your money grow, you’re going to need a return that’s even higher – something you just can’t find in flexible products on the high-street.   

Best inflation-beating ISAs

That’s why savvy savers are turning to the financial markets in an attempt to protect their money and grow it for the future.

If you do it well, investing gives you the opportunity to offset the impact of inflation and hunt for returns that can help you achieve your financial goals quicker.

Before you look to invest your money, make sure you’ve paid off any expensive debt and have saved up around three months of outgoings in an easily accessible savings account – you never know when the washing machine might break mid-way through football season.

An investment strategy for you

All investment carries risk, it’s how you manage this risk that matters. What works for your friends might not be appropriate for you and your financial goals. Your investments should reflect what you’re saving for, when you’ll want your money and your financial background.

Understanding your investor profile and tailoring your portfolio to your tolerance to risk is one of the first steps to achieving your financial goals – it’s the DNA of your investment strategy.

However, the hard work doesn’t stop there. As the markets move, so will the appearance of your portfolio. It’s important you recognise these changes and adjust them back inline with your investor profile.

It’s important you don’t put all your money in one investment – it’s a risky game to play that rarely pays off. Instead, manage the risk in your portfolio by spreading your money across investments, asset classes and geographies. Any losses should be offset by gains made elsewhere in your portfolio.

Diversification takes time, skill and knowledge to get right – not to mention the extra capital to trade yourself. That’s why many investors prefer the experts to do it for them. These funds can come with hefty price tags, however, which can eat into your return and delay you from achieving your goals.

Before you chose an investment, make sure you take the time to understand the fee structure. At Moneyfarm, we keep are costs simple and low-cost. You deserve to know how much you’re paying and keep as much of your money as possible.

Five tips to inflation proof your ISA

  1. Invest your savings in a stocks and shares ISA
  2. Invest your way – make sure your portfolio reflect you and your financial goals
  3. Make sure your portfolio is diversified across investments, asset classes and geographies to manage risk
  4. Invest a little and often to average the amount you pay for an asset over time
  5. Keep an eye on investment costs so you can keep more of your money

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