Savers who use cash Isas are losing out as inflation erodes their purchasing power, new analysis claims.

After a brief period of seven months where returns on the average cash Isa beat inflation, they have fallen back into negative territory, according to Quilter.

When CPI inflation hit 2.5 per cent in the 12 months to December 2024, average monthly interest on cash Isa deposits fell to 1.84 per cent, meaning savers faced a real-term loss of 0.66 per cent.

And in bad news for savers, figures yesterday revealed inflation had jumped to 3 per cent in January. 

That will make matching inflation harder but not impossible for those who actively seek out the best cash Isa rates.

The situation also marks a significant improvement from July 2022, when savers were facing a historic 9.4 per cent loss on their money as sticky inflation ate away at savings pots.

Quilter predicts the trend will only continue, particularly with inflation widely expected to rise slightly again. 

And with the Bank of England likely to cut interest rates at least twice this year, and cash Isa providers likely following suit, it is likely to widen the gap further.

The figures come amid speculation that the Chancellor is planning to reduce the cash Isa tax-free allowance or axe it entirely, following meetings with City bosses.

Financial firms claim the £421billion held in cash Isas could be put to better use if savers instead held their money in investments. 

Quilter is warning cash Isa savers to consider opening a stocks and shares Isa in April when the new tax year starts, to give them a better chance of keeping pace with inflation.

Someone who invested £10,000 in a cash Isa in December 2012 would currently have £11,955. Adjusted for inflation, this is just £7,918. 

In contrast, a £10,000 investment in the IA Global Equity index over the same period would be worth £33,526 or £22,221 after inflation.

However, some cash Isa savers say they like to keep their savings in a less risky vehicle, while others merely want the choice.

And some providers are offering competitive rates to lure savers to deposit their cash with them. 

Trading 212* is offering customers 5.03 per cent if they use the code TIM, while Moneybox follows closely behind with 5.02 per cent.

You can see the full list of This Is Money's best cash Isa deals here.

Savvy savers ARE beating inflation

But while Quilter says savers are missing out, data from Paragon Bank suggests that most tax-free savers are currently beating inflation, thanks to higher rates on offer via best buys.

Its analysis shows 81 per cent of cash Isa balances beat the inflation rate of 3 per cent, suggesting they are targeting accounts that offer better returns. 

Derek Sprawling, Paragon Bank Managing director of savings, said: 'This data suggests that Isa savers are perhaps more proactive in the management of their accounts and target those accounts that offer better returns, and certainly above the rate of inflation. 

'It may also suggest that some savers are putting their non-Isa savings into savings accounts linked to a current account, which typically offer less attractive rates.

'However, 20 per cent of Isa cash balances are still earning below the rate of inflation, which means the long-term value of that cash is being eroded. 

'This is despite plenty of accounts available that offer returns in excess of 2.5 per cent.'