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

Is your money working as hard as you? Why not pay into a Stocks and Shares ISA to 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 can certainly make it work. And how hard it’s working will depend on where you put it. So, 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, paying into a Stocks and Shares ISA could help.


What is inflation and how does it affect your savings?
You’ve heard the word, but what does ‘inflation’ actually mean? Put simply, inflation is when things get more expensive. Take milk for example. Back in 1980, a pint used to cost about 17p. Fast forward to 2020, and you need to spend about 44p for a pint of milk1. This is inflation in practice! Needless to say, if your pay doesn’t 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, you’ll need to receive an interest rate of at least 2% 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! 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. 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, it could be worth looking at other options.


So, how could a Stocks and Shares ISA help protect your money from inflation?
One good way to protect your money from inflation could be to invest. 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. 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, people who invested in the UK market, FTSE 100, for any 10-year period between 1984 and 2020, have had an 89% chance of making a gain3. And if you look at the annualised returns of the index, you’ll likely see numbers that exceed the rate of inflation. For example, since 1983, the FTSE 100 has returned about 6.2% a year (with re-invested dividends) – which sits well above the average inflation rate (RPI)4.

So, with a Stocks and Shares ISA, not only will you be giving your money a chance to grow faster than inflation, you’ll also be removing tax from the equation. 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 (subject to change) and you can’t pay into more than one Stocks and Shares ISA this current tax year. Also, you have until midnight on 5th April to use your ISA allowance.




3: Data from Bloomberg

4: 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.

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