Rates on best buy ISAs nearly halved in the past year
The average interest rate of the top 20 best buy cash ISAs stood at 1.67% this time last year, but now stands at just 0.87%, according to financial advice firm Salisbury House Wealth.
But despite rates plummeting, savers have continued to pour money into cash ISAs. The number of people subscribing to cash ISA accounts has increased by 20.8% to 8.5m in the past year.
The amounts subscribed have increased to £44bn, up from £36.7bn the year before, and increase of 19.8%.
Savers were dealt a blow in March when the Bank of England cut the base rate due to the coronavirus. The base rate was reduced from 0.75% to 0.25% at the beginning of March, and then cut again to just 0.1% a week later.
As a result, cash savings products currently offer historically low returns to savers.
Salisbury House Wealth says cash saving products are expected to continue to underperform, as interest rates are unlikely to be increased during the pandemic.
There are also fears that consumer inflation might be rising faster than official figures suggest, which means that cash ISA savings are eroding faster in real terms than previously thought.
Salisbury House Wealth says that investors who drip feed their cash into the stock market may see better returns than cash, despite current volatility.
Equities have typically outperformed other asset classes over the long-term. Since 1925 equities have delivered average annual returns of 12.4%, higher returns than cash (4.9%), global bonds (6.6%), rental property (7.2%) and gold (7.7%).
Tim Holmes, managing director at Salisbury House Wealth, said: “Savers have struggled with ultra-low interest rates and it looks like they face more years of negative real returns.
“Obviously investors need to be careful about when they put large lump sums into the stock market but historically, cash woefully underperforms.
“The best approach to investing is to have a diverse portfolio with a range of asset classes that have a relatively low correlation such as some forms of fixed income as well as equities.”