People who use cash Isas to save for their retirement face a looming crisis because of high levels of inflation, the boss of a leading wealth manager has warned.

Mark FitzPatrick, chief executive of St James’s Place, said opening a cash ISA to save for a pension was a bad move because the nest egg will be “eroded by inflation” amid rapidly rising living costs.

“Having cash is important but if you’re going to save for your pension, that’s the wrong vehicle to do it in… On a real terms basis, they’re going to start losing money very soon,” he said.

“You need to be invested in the market so that you’re getting real, net positive growth… For some people, it feels that they’re over-saved and underinvested”

The FTSE 100 boss warned a lack of proper investing risked leaving large numbers of people “reliant upon the state pension” if they fail to grow their retirement savings in line with rising prices.

Cash Isas typically provide interest rates of less than 5pc per year - meaning savers risk seeing any gains eroded by current rates of inflation of over 3pc.

For comparison, the FTSE 100 index has posted gains of over 9pc over the past year, while the S&P 500 has posted gains of almost 16pc over the same period.

The warnings come after Rachel Reeves paused plans to overhaul the cash ISA regime by lowering the £20,000 tax free limit.

The Chancellor’s plans were aimed at encouraging more people to invest in stocks and shares in her push to boost Britain’s ailing markets.

Mr FitzPatrick said an overhaul of the ISA regime could help encourage investment if the tax advantages offered started to taper off when savings reach high enough levels.

He said: “I could see a world where cash Isas and the scale of cash Isas come down a bit, especially post a certain level, once you’ve built up a certain cash buffer… But it needs to be a carrot and stick. It can’t just be, ‘I’m taking away one of the advantages’.”

St James’s Place does not offer cash Isas for its customers, and instead tries to sell them stocks and shares Isas.

The Government is seeking to shake-up Britain’s retirement saving landscape having appointed a new Pensions Commission to explore ways to encourage Britons to save more.

One of the reasons often cited for the low level of pension savings is that many people think the property market will ride to the rescue.

However, Mr FitzPatrick warned that people who expect to retire on money they make from house prices rising could also face financial shortfalls, if price increases in the UK’s property market fail to materialise.



He said: “A lot of people think ... the property market is going to perform like it did in the last 20 or 30 years. No economists expect the housing market to grow at that level for the next 20 or 30 years. It was something that was amazing but it’s unlikely to repeat itself again.”

His comments come as experts predict UK house prices will stagnate following more than two decades of fast paced growth, which according to the Office for National Statistics, saw average prices rise by 215pc from £85,000 in 2000 to £268,000 today,

Mr FitzPatrick said the looming crunch could cause financial trouble for savers that could see them forced to rely on Britain’s state pension, which currently provides a pension worth £11,973 per year.

“We have a moral commitment to help people understand that ... if they’re reliant upon the state pension, they’re going to get in trouble,” Mr FitzPatrick said.