At 3.3% Inflation, Your 4.51% Cash ISA Is a 1.2% Real Return — While the FTSE 100 Pays You 3.5% in Dividends Alone Before a Single Share Moves

The ONS confirms that CPI inflation hit 3.3% in March 2026, up from 3.0% in February. CPIH — the preferred measure including housing costs — is at 3.4%. RPI, the old measure still used for index-linked gilts and some pension calculations, is at 4.1%.

On any of these measures, the "real" return on the best cash ISA is somewhere between 0.4% and 1.2%. That is not wealth building. That is treading water while hoping the current doesn't get stronger.

And the current is getting stronger. Inflation is accelerating, not decelerating. The Bank of England has cut rates three times since February 2025 — from 4.50% to 3.75% — and the BoE's own data suggests the direction of travel is clear. Every rate cut pushes cash ISA rates lower. Inflation does not care about the base rate.

Here is the uncomfortable truth that cash ISA advocates will not tell you: over any 10-year period in modern British history, equities have beaten cash. Not sometimes. Not usually. Every single rolling 10-year period since 1950. The Barclays Equity Gilt Study — the definitive reference for UK asset returns — documents this in exhaustive detail. Cash preserves nominal capital. Equities preserve and grow real purchasing power.

British American Tobacco yields 5.04%. That is a higher cash return — before a single share of capital appreciation — than any cash ISA on the market. And in a stocks and shares ISA, it arrives free of dividend tax, which at the higher rate now stands at 35.75% for 2026/27.

Shell trades at 13.5 times earnings and yields 3.6%. HSBC trades at 14.7 times and yields 4.2%. These are not speculative technology companies trading on narratives. They are large, globally diversified businesses with multi-decade track records of returning cash to shareholders.

The counter-argument is that dividends can be cut. True. BP cut its dividend during Deepwater Horizon. Banks cut during 2008. But a diversified equity income portfolio holds 30-40 names. Some will cut. Most will not. The aggregate dividend stream from a FTSE 100 tracker has grown in nominal terms in 38 of the last 40 years.

Meanwhile, your cash ISA rate can also be cut — and unlike a dividend, which reflects a board's assessment of sustainable earnings, your cash ISA rate reflects a bank's assessment of what it needs to pay to attract deposits. When the Bank of England cuts to 3.50% or 3.25%, those 4.51% easy-access rates will not survive the week.

See our stocks hub for live data on every FTSE 100 constituent, including dividend yields, P/E ratios, and price charts.

The ISA wrapper's power is not the annual tax saving. It is the compounding of tax-free returns over decades. Put £20,000 in a cash ISA at 4.51%, reinvest the interest, and after 20 years you have roughly £48,000 in nominal terms. Adjust for even 2.5% inflation and the real value is closer to £29,000.

Put £20,000 in a global equity tracker returning 7% annualised and after 20 years you have £77,000. Tax-free. No capital gains. No dividend tax. That is the ISA wrapper doing its actual job — sheltering genuine wealth creation, not babysitting a bank deposit.

This is not speculation. This is arithmetic. The difference between 1.2% real and 4-5% real compounded over two decades is not marginal. It is transformational. The person in cash has £29,000 in today's money. The person in equities has £50,000-£77,000. Same contribution. Same tax wrapper. Different asset class. Different outcome.

The government knows this. That is exactly why it is cutting the cash ISA allowance to £12,000 for under-65s from April 2027 while keeping the stocks and shares ISA at the full £20,000. The policy objective is to nudge savers toward productive investment. You can resent the nudge, or you can follow the logic and keep more of your returns.

For more on maximising your ISA across asset classes, visit our ISA hub.

Cash ISA advocates love the FSCS argument: £120,000 of deposit protection per banking licence. It sounds reassuring. But it protects against exactly one risk — the bank going bust — which is the least likely financial risk you face.

The risks that actually destroy wealth are inflation, longevity (outliving your money), and undersaving (not generating enough return). The FSCS protects against none of these. It is like buying a car with an unbreakable windscreen and no engine.

FSCS investment protection — £85,000 for platform failure — is different. It covers you if your platform collapses and client assets are missing, which in a properly ring-fenced nominee structure is extraordinarily unlikely. Your actual investments — the shares and funds themselves — are held separately from the platform's own balance sheet. Platform failure does not mean your Shell shares disappear.

Yet the real protection in a stocks and shares ISA is diversification. Holding 500+ companies across multiple geographies means no single corporate failure can meaningfully damage your wealth. A cash ISA concentrated in one bank has a single point of failure. The FSCS backstop is there precisely because that concentration risk exists.

Read our investment platform comparisons to understand how client asset protection works in practice.

Yes, the cash ISA allowance drops to £12,000 for under-65s from April 2027. The response from cash advocates is: "fill it now while you can." The correct response is: "the government is telling you, explicitly, that cash ISAs are a policy problem, and you are responding by doubling down."

The full £20,000 ISA allowance remains available for stocks and shares. The government is not cutting that. It is ring-fencing the full allowance for productive investment while restricting the portion that can sit in deposit accounts earning modest interest. If you believe — as most economists do — that policy incentives matter, then the 2027 change is a signal about where the long-term value lies.

Use the full £20,000 this year. Put it in a stocks and shares ISA. Buy a low-cost global equity tracker. Reinvest the dividends. Let the tax wrapper do what it was designed to do: compound real wealth over decades, not babysit cash that loses purchasing power every year the inflation rate stays above 2%.

The UK's own economic data shows GDP growing despite headwinds. Companies are adapting. Earnings are being generated. Dividends are being paid. The real risk is not market volatility — it is waking up in 2046 with a cash ISA balance that buys half of what it bought in 2026.