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How can a Stocks and Shares ISA protect your money from inflation?

Is your money working as hard as you are? Why not consider paying into a Stocks and Shares ISA to see if you could help your money flourish over the long-term?
How can a Stocks and Shares ISA protect your money from inflation?
Reading time: 5 mins

Money doesn’t grow on trees, but you could certainly make what you do have work harder. And how hard it’s working will depend on where you put it - meaning that it’s important to understand the options you’ve got.

If you want to give your money a tax-efficient boost and potentially enjoy inflation-beating returns, then paying into a Stocks and Shares ISA could help. Here's why. 

What is inflation and how does it affect your savings?

You’ve heard of the word, but what does ‘inflation’ actually mean? Well, put simply, this is when things (such as goods and services) get more expensive over time. Take milk for example. Back in 1980, a pint used to cost about 17p. However, as recently as March 2023, the average price for the same amount was 70p1. This is inflation in practice!

Needless to say, if your pay doesn’t increase and follow the general rise of prices, your purchasing power will automatically decrease and over time you won’t be able to afford as much as you could before.

And that’s not all! Inflation could also have an impact on your savings.

You may think that your money is safe since it’s tucked away, but over the long-term, inflation could affect the real value of your savings. How, you ask? Well, to experience actual growth, your money will need to grow at least at the same pace as everything else. So, knowing that the UK government aims to keep inflation at 2% a year (though it hit a 41-year-high in October 2022, reaching 11.1%), you’ll need to receive an interest rate of at least the same amount as inflation to preserve the purchase power of the money you’ve put aside2.

But let’s be honest, not many people receive 2% interest on their savings, let alone over 10%!

Typically, interest rates offered by banks are low, and every time they fall below the rate of inflation, the value of your savings will decrease, meaning your money won’t stretch as far when you finally come to spend it if you're keeping it saved for a number of years. And while there’s no denying that putting money in a savings account is crucial for covering unexpected expenses, but if you’re after returns that beat inflation, then it could be worth looking at other options.

So, how could a Stocks and Shares ISA help protect your money from inflation?

One way to help protect your money from inflation could be to invest. This is is because with investing, your returns aren’t tied to any fixed interest rates. This means that there’s no guarantee you’ll get back what you initially put in, and there’s even a risk you could end up with less money as stock market performance can fluctuate over time.

However, on the other side of the coin, investing could provide you with higher returns than you may get from a savings account. In fact, over the long-term, that’s exactly what investing is here to do! According to many studies, the longer you remain invested, the more likely you are to see positive growth. For instance, as of 2022, people who invested in the UK market (the FTSE 100) for any 10-year period since 1984 have had an 89% chance of making a gain3.

So, with a Stocks and Shares ISA, not only could you be giving your money an opportunity to grow faster than inflation, you’ll also be removing tax from the equation as the good thing about Stocks and Shares ISAs is that you get to invest without paying UK tax on any profits you make.

But remember, the total amount you can put in is limited to £20,000 a year for the 2023/24 tax-year (although this may be subject to change in future), and you can’t pay into more than one Stocks and Shares ISA this current tax year, although you will be able to spread your allowance across the 4 different types of ISAs. Also, you have until midnight on 5th April each year to use your ISA allowance before it resets.


1: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/cznt/mm23

2: https://www.bankofengland.co.uk/monetary-policy

3: Data from Bloomberg 

The tax treatment depends on your individual circumstances and may be subject to change in the future.

Please remember the value of your investments can go down as well as up, and you could get back less than invested.

Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.

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