Are ISAs still the best option with inflation rising and rates remaining low?

Are ISAs still the best option with inflation rising and rates remaining low?

Savers have been flocking to ISAs to store money saved in lockdown but with interest rates at rock bottom and inflation creeping upwards, the money is at risk of being eroded away if left in a cash ISA. 

So, is it better to choose a stocks and shares ISA or to try P2P lending in an IF-ISA? We look at the current situation, how the economy is affecting our savings, and your options when looking for the best return.

ISAs boom in popularity after lockdown savings

We’re all very used to staying at home now and even though things have opened again in the UK, lots of us are still working from home and not back to the weekly commute.

During lockdown, many people were able to save up because they weren’t going out as usual or spending money on luxuries like holidays or nights out. Lots of people used the money to buy houses, there has been record growth in the property market in the last year, while others poured their cash into ISAs.

The tax breaks of using an ISA are a clear winner if you’re looking for somewhere to put your savings and this year saw a huge spike in new accounts being opened. Around 13million ISA accounts were opened in 2019 - 2020, up from 11.2million the previous year, according to data from HM Revenue & Customs (HMRC). The majority of accounts were cash ISAs, with 1.2million more opened in 2019 compared to 2018.

However, while cash ISAs are a good option for those who need access to their savings, they typically aren’t the best option when looking for a high return, especially in today’s climate where interest rates are low and inflation is rising. 


What’s happening to inflation?

Inflation has been steadily rising during the course of the pandemic and the latest figures show it fell to 3.1% in September, a slight fall from 3.2% in August. 

The Consumer Prices Index (CPI) which measures the cost of a basket of goods each month, is way off the government’s target of 2%. 

Prices remained high for September because of a rise in transport costs, and fell slightly because of a decrease in costs in the hospitality sector. 

Transport in particular was a major factor and in September the cost of fuel was the highest recorded since 2013, according to the Office for National Statistics (ONS).

Even though inflation fell, some have predicted it will continue rising and may hit 4% by Christmas. 

When will interest rates rise?

Savers have been keeping a close eye on interest rates hoping the Bank of England will make an announcement to increase them.

Ever since the pandemic struck in March 2020, they’ve been kept at a rock-bottom low of 0.1%. This has meant returns on traditional savings products have been dismal and with inflation rising, many have been losing out.

There are predictions that interest rates will rise this year, or early in 2022, although the last 18 months has taught us nothing is set in stone and it’s impossible to make predictions!

Now inflation is the main driving force for an interest rate rise, to try to get it back down to the government’s target rate of 2%.

Is an IF-ISA a better option than a traditional cash ISA?

If you’ve got lockdown savings, or any savings for that matter, it’s important they’re in the best home possible. One which will let them grow, and one that is secure and you’re comfortable with.

You have a few different options and if you’re going for an ISA, there’s the following three to pick from.

Cash ISA

Arguably the safest option when it comes to ISAs, you choose an ISA and put your money into it. It pays interest, and then when the term of the ISA is up you can take your money out.

There are also easy-access options if you need to get your hands on the cash earlier. This is a good option if you’re going to need your cash in the short-term although it usually pays the lowest rate of interest, especially when interest rates are low as they are right now. If the interest rate of your account is lower than the current rate of inflation - you’ll be losing money on it.

Stocks and shares ISA

There’s risk involved but potentially higher returns if you’re happy putting your money away for longer, usually around five years.

There’s more chance of beating inflation with investments instead of cash and any growth or income generated is tax-free. There’s a wide range of investments to pick from, from government and corporate bonds to investments trusts and funds.

Innovative Finance ISA (IF-ISA)

The newest ISA to the gang, the innovative finance ISA, or IF-ISA for short, is for P2P lending. It contains P2P loans instead of cash or investments and interest rates are generally higher than you’ll get from a traditional savings product.

This is because there’s no middle man (or woman) - you’re cutting out a bank by investing your money directly through the IF-ISA.

You could also get a better rate of interest, although there is more risk involved than using a traditional savings account. You’re not covered by the Financial Services Compensation Scheme (FSCS), for example, and as it’s not a cash savings account, access isn’t guaranteed. 

Is P2P Lending a good idea with rock bottom interest rates?

Interest rates are still at rock bottom rates and with inflation rising - and predicted to reach 4% by the end of the year - if you're savings are in an account lower than the rate of inflation, you’ll be losing money.

Therefore, choosing P2P Lending over a cash savings account is likely to generate more interest and make your money work harder. However, there are no guarantees and it’s only right if you know exactly what you’re doing and you’re happy with the level of risk with P2P lending, and you don’t need instant access to the money. 

However, with the right IF-ISA provider it is possible to make your money work harder for you. With easyMoney, for example, our P2P lending is backed by UK property, and you could get a target interest rate of between 3.08% and 8% - why not take a look for yourself at www.easymoney.com/ifisa


All the facts and figures presented are accurate at the time of posting.

easyMoney is not a cash savings account. You may not get back the full amount you put in. Your capital is at risk if you invest. Peer-to-peer investments are eligible for an Innovative Finance ISA which is not a Cash ISA. They are not protected by the Financial Services Compensation Scheme (FSCS). Money invested through easyMoney is concentrated in property and could be affected by market conditions. For the same reason, instant access cannot be guaranteed. We do not offer investment or tax advice.

easyMoney is the trading name of E-money Capital Ltd, a company incorporated in England & Wales. Registered office is 5 Fleet Place, London, England, EC4M 7RD (Company No. 04861007). E-money Capital Ltd is authorised and regulated by the Financial Conduct Authority (FCA) #231680.

Written by The easyMoney Team

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