Savers are missing out on millions of pounds in interest after leaving £54 billion in low-interest savings accounts.
Analysis from savings provider Paragon Bank has found £52.4 billion is languishing in instant access accounts that pay less than 2% interest, while £1.7 billion is held in fixed-rate ISAs earning 2% or less.
Further to that, an astonishing £250.6 billion is held outside of ISA wrappers and earning less than 2%, according to Paragon.
Of 7.2 million instant access ISAs earning less than 2%, around 1.6 million hold more than £10,000. This means millions of savers are potentially losing out on significant interest earnings, while the value of their savings deteriorates versus inflation.
Inflation is currently running at 3% on the Consumer Price Index (CPI) measure of price rises from the Office for National Statistics (ONS). Any money held in accounts that pay below the level of inflation are having the value of their money eroded over time.
Despite this, easy-access ISA rates pay up to 5% interest, according to savings comparison service Moneyfacts.
Derek Sprawling, Paragon Bank managing director of savings, comments: “Over 96% of cash ISA balances earning 2% or below is held in instant access variants, meaning that people can easily switch that money into a better paying account.
“On average, these accounts contain over £7,000 and that money could be generating much better returns by switching. Many savers overestimate the effort involved in switching a cash ISA. I’d encourage anyone receiving under 2% to consider their options.
“On the plus side, it’s positive that savers are protecting their money from tax by keeping it within an ISA wrapper, but on the downside, there’s billions of pounds that could be working harder by being moved to higher paying accounts.”
Role of cash in a portfolio
Cash has an important role within a wider personal financial portfolio, but for long-term growth, leaving money languishing in cash leaves savings open to devaluation, especially considering the pernicious effects of inflation.
Cash can provide a useful buffer when investment markets retrench and can also be an essential backup for a rainy day.
But beyond these short-term requirements, it’s generally better for long-term savings to be invested in order to ensure they have the best opportunity to earn growth or income.
If you have any questions about the right balance to strike for your long-term wealth growth, don’t hesitate to get in touch to speak to an expert financial adviser.
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