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Santander’s 123 account is one of several cash savings accounts that recently said it will slash the rate of interest paid to savers – from 1.5% to 1%. The ongoing sting in the tail is the monthly fee customers pay simply to hold the account.

The Santander account isn’t alone. Many bank savings accounts offer interest rates lower than 1% and some pay no interest at all. Bank of England data show the average “instant access” interest rate in December 2019 was 0.39%¹. That means banks pay less interest on funds borrowed from their savings-customers than they pay when they borrow funds from the Bank of England (currently the “bank base rate” is 0.75%). No wonder banks compete so aggressively for household deposits.

Thinking of yourself as a business

But what if you considered yourself not as a household but as a business? Your business grow at the going rate of inflation, in line with the average cost of all the things we need to live, such as food, clothes, technology and so on. Let’s estimate inflation at 2%, which is the Bank of England’s long-term objective for a stable inflation rate.

In contrast, the cash assets of your “business” grow by the interest rate you are paid on that capital. Let’s keep it simple and say you receive an interest rate equal to the Bank of England base rate, which as we just stated is currently 0.75%.

At these rates, your outgoings are growing faster than your capital. That’s not a great business strategy. The chart below shows the outcome of this “strategy”, using historical inflation and base rates, since 2000. Mostly, you have lost money – see the section of the graph below the red line. And that’s without including the cost of monthly bank charges, currently £5 a month for the Santander 123 account!

Using tax benefits to secure the future-you

If you wish your capital to sustain a certain lifestyle in the future, you must earn a return higher than inflation. Some investors may be attracted to property investment, since mortgage rates are currently very low².

Another option is tax-free investment in a pension, ISA or Lifetime ISA³. Within such funds, an allocation to stocks and shares has the potential to deliver better long-term returns than bank deposit rates. Along with the tax benefits, multi-asset investment portfolios can offer greater diversification and liquidity. Their risks are spread across assets and geographies.

Of course, in both property and financial investing, capital value is at risk. And, clearly, these are very different investment options. You can’t sleep in an investment portfolio.

Investment or bust?

If you choose a cash ISA, rather than a stock and shares ISA, savers currently are offered a maximum of less than 1.7% annual return on a fixed three-year term deposit, according to the “best buy” list provided by Savings Champion. The Bank of England has forecast that by the end of 2022, the inflation rate will be about 2.2%⁴.

Clearly, your capital will have to work hard if inflation-busting returns are required. Yes, working hard does require a bit of sweat, and in an investment context, sweat means risk. However, over the long term, higher risk is associated with a higher return⁵. In that sense, volatility (risk, sweat) is your friend.

If you have time on your side and you are willing to take some risk, the future-you may be better served by a well-diversified investment portfolio than a cash ISA, which may slowly be sending you bust.


  1. Bank of England, Quoted household interest rates, December 2019. Reference rate IUMB6VK.
  2. Borrowers are among the main winners when interest rates are so low; savers tend to lose out.
  3. Capital gains are tax free in all these funds. Pensions also benefit from tax relief on contributions while the Lifetime ISA offers eligible investors a 25% top-up on contributions up to £4,000 per year.
  4. Bank of England Inflation Report, November 2019, page 4.
  5. In the five years ending December 2019, a portfolio consisting of 60% diversified global equity basket and 40% broad basket of UK bonds, has delivered an average annual return of 9.5%, compared to 1.7% in inflation. That’s a real return of 7.8% before investment costs. Calculation based on MSCI World Large & Mid Cap stocks (GBP) and ICE BofAML UK Sterling Broad Market Index. Sourced from Macrobond.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past and future performance indicators are not reliable indicators of future performance. Tax treatment depends on your individual circumstances and may be subject to change in the future.