SITUATION ROOM · UK PERSONAL FINANCE

CASH ISA — REAL RETURNS SINCE 1999

A saver who maxes out their Cash ISA every tax year since launch in April 1999. Their pot is plotted against the inflation benchmarks — CPI, RPI, BoE M4 broad money — and against an S&P 500 total-return alternative in GBP. The tax-free wrapper protects you from HMRC. It does nothing about the central bank.

The Cash ISA is sold as a tax shelter for savings, and that's exactly what it is — only a tax shelter. The interest you earn isn't taxed. Nothing about the wrapper does anything about the rate of interest itself, which for the entire period since 2009 has sat well below the rate at which consumer prices have risen. You compound at one number; prices compound at a bigger one. The pot grows nominally and shrinks in real terms simultaneously.

CPI and RPI are conservative measures of inflation — they track a basket of consumer goods, with various methodological choices that tend to understate the lived experience of cost rises (housing, in particular, is treated very differently in CPI than RPI). The broader measure is M4 broad money: the total stock of pounds in the UK financial system. When the Bank of England creates new money, existing pounds are diluted — the same way new shares dilute existing shareholders. Over the 27 years above, M4 has roughly tripled. Your share of the money supply, sitting in cash, has shrunk accordingly.

And then there's opportunity cost. The S&P 500 line in the chart is what the same contributions would have become if invested in productive assets — companies that earn, grow, and pay dividends — rather than parked as depreciating IOUs from a commercial bank. The gap between those two lines is the price of choosing “safe”.

None of this means cash is useless. It means cash is a tool for short-horizon liquidity, not a strategyfor multi-decade saving. A Cash ISA earning tax-free interest below CPI is, structurally, a slower way to lose money than a regular savings account — not a way to keep it.