What's a Better Protection Against Inflation: Cash ISAs or Stocks and Shares ISAs?

ISAs are a popular investment option in the UK, offering tax efficiency and potential long-term returns. But which individual savings account option is best for tackling periods of high inflation? 

When you invest in an ISA, the profit you make is exempt from capital gains tax (CGT). These types of savings accounts also shield your money from income tax, meaning that your earnings are far better protected from deductions. 

With an annual allowance of £20,000 that can be saved in different types of ISAs, whether you prefer a Cash ISA or Stocks and Shares ISA, or a mix of both, it’s possible to compound your earnings and build a sizeable nest egg for the future. 

But what happens when we find ourselves in a period of high inflation? Could Cash ISAs or Stocks and Shares ISAs keep us better protected against the damaging effects of devalued savings? 

Fighting Inflation

While Cash ISAs operate at a fixed rate of return, Stocks and Shares ISAs behave like stock market portfolios, and their returns can vary wildly based on the assets you own. 

Because inflation sends that cost of living higher with rolling price rises that devalue cash, your ISAs can be especially vulnerable to periods of high inflation because your earnings will be actively worth a little less than a year ago. 

So, are Cash ISAs or Stocks and Shares ISAs better for fighting inflation? The answer, frustratingly, is that it depends. 

Historically speaking, shares have generally outperformed Cash ISAs after inflation over the long term. However, there’s increased risk associated with stocks and shares that you don’t have to live with when opening a Cash ISA. 

Looking at more recent trends, Stocks and Shares ISAs also outperform cash. Inflation data shows that January 2025 was the third month in a row where Cash ISA savers saw a ‘real terms’ loss on their savings accounts. 

As Consumer Price Index (CPI) inflation reached 3% in the 12 months to January 2025, it meant that Cash ISA savers would need to access higher returns than this figure to continue making a profit on their investments. 

With the monthly interest rates available on Cash ISA deposits, including unconditional bonuses, falling to 1.77%, this means that savers are facing a real terms loss of 1.23%. 

Are Stocks and Shares Always Better? 

There’s certainly a case to be made that stocks and shares are more rewarding investment options, particularly when the average Stocks and Shares ISA returned almost 12% over the past 12 months, as opposed to 3.8% for the average Cash ISA. 

These higher returns can be attributed to the strong recent performance of the stock market. In 2024, the S&P 500 returned 23%, with many AI stocks rapidly accelerating in value. 

However, as many investors know, stocks can go down as well as up, and in 2022, many risky investments suffered major losses on Wall Street and the London Stock Exchange. 

These stock sell-offs were caused, in part, by inflation. As the cost of living rose, central banks opted to hike interest rates to slow down CPI, causing investors to sell off their stocks fearing a downturn. 

As a result, the average Stocks and Shares ISA fund experienced a loss of 3.27% between February 2022 and February 2023, indicating that stock market investing isn’t always more effective than Cash ISAs. 

Because inflation can adversely affect stocks and shares, the more straightforward terms and AER offered by Cash ISAs mean that they can be far simpler tools to strategise navigating periods of high inflation. 

If you’re worried about inflation devaluing your cash pot, be sure to look at the current CPI rates and the interest rates that providers can offer. Should your provider offer a rate of return that’s consistently higher than inflation forecasts, your Cash ISA could be a reliable means of protecting your wealth from the impact of devaluation in real terms. 

Which ISA Option is Best for Your Needs?

Sadly, there’s no simple answer to this question. If you’re worried about inflation, it’s worth noting that both Cash and Stocks and Shares ISAs have a strong track record of beating inflation over time. However, both can be vulnerable to upturns in rates. 

As UK inflation peaked at 11.1% in October 2022, both Cash and Stocks and Shares ISAs struggled to keep up with the rising cost of living. However, both have consistently outpaced inflation over the long term, suggesting that opening an individual savings account is best when adopting a mindset to build your savings over many years. 

While Stocks and Shares ISAs have consistently outperformed Cash ISAs in the past, they represent a higher level of risk, and if you’re uncomfortable building a nest egg for the future that could go down as well as up, it may be worth shopping around for consistent Cash ISA rates instead. 

Inflation has meddled with our ability to save for many years now, and many investors have struggled to settle on a strategy they’re comfortable with against the rising cost of living. The tax efficiency of ISAs offers an excellent starting point for saving and can help you to build your wealth no matter your risk appetite.