Research by Royal London found if all the money invested in cash ISAs in the last ten years had been invested in a multi-asset fund, it could now be worth around £360bn, instead of the £250bn currently held in cash ISA accounts.

The report said holding some cash can be useful to cover emergency expenditures, but when cash holdings turn from a short-term buffer to a long-term investment, “alarm bells should start ringing”.

It said: “More needs to be done to wean individuals off the habit of using cash ISAs as a long term savings vehicle. Otherwise, many more people will find later in life that their savings have shrunk in real terms and that the money runs out sooner than they expect.”

With interest rates persistently below the rate of inflation in recent years, holding cash has caused an erosion in capital, in real terms, year after year, the report said.

Cash ISA rates from high street banks have fallen to as low as 0.1% or less, while inflation has reached 1.6% and is forecast to rise in 2017.

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The report found £1,000 put into a deposit account 10 years ago would be worth less than £900 in today’s money, while £1,000 put into a simple multi-asset fund – with exposure spread across equities, bonds and property – would have been worth more than £1,500 in today’s money.

‘Government should lower cash ISA limit’

Steve Webb, director of policy at Royal London, said the amount of money going into cash ISAs in the last two years has surged in response to the big increases in ISA limits.

The threshold has jumped from just £3,000 in the 2007/8 tax year to £15,240 in the current tax year. It will rise to £20,000 from 6 April.

“The government should reinstate a separate and lower limit on the amount that can go into cash ISAs to protect investors from the risk of seeing their savings eroded by inflation,” said Webb.

“The government must urgently review its savings strategy before investors lose out billions more in returns on their hard-earned savings.”

According to the Royal London findings, nearly half of the £518bn invested in ISAs is held in cash.

Between 2013/14 and 2015/16, the amount invested per year in cash ISAs soared from just under £40bn to nearly £60bn, an increase of just over 50% in two years.

New investment in stocks and shares ISAs rose by just 16% to £21bn over the same period.