Savers should be weaned off relying on cash Isas as a long-term savings option, according to a report which estimates people have collectively missed out on more than £100 billion in returns they could have made elsewhere.
While keeping savings in cash can appear to be the safe option, in the longer term people are taking a risk by keeping significant amounts of their savings in cash, Royal London's report warned.
The report, titled The Curse Of Long Term Cash, said there are good reasons for keeping some cash aside for short-term purposes, such as having an emergency "rainy day" fund.
But it warned: "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."
It said that while cash offers short-term security, "large holdings of cash are vulnerable to bouts of unexpected inflation, like the 1970s, or long periods with interest rates well below the rate of inflation like today".
If the money held in cash Isas in the last decade had instead been invested across a range of assets it could now be worth around £360 billion, the report said, compared with the £250 billion currently held in cash Isas.
Savers have therefore missed out on more than £100 billion in returns by using cash as a long-term investment strategy, it calculated.
And if the real value of cash Isas had kept pace with inflation over the last 10 years, their total value would be more than £276 billion by now, instead of £250 billion, the report calculated.
This suggests that inflation has wiped the equivalent of £26 billion off the purchasing power of cash Isas over the last decade.
While a multi-asset fund spread across equities, bonds and property can suffer from bigger fluctuations over the short term, these asset classes have historically offered higher returns than cash and are therefore more appropriate for long-term investment, Royal London argued.
Among the savers whose Isas are exclusively in cash, some three million people had balances of more than £30,000 in 2015-16.
Royal London said that as this sum is higher than the average annual UK wage, it suggests these Isas are being relied on as long-term investments rather than short-term savings.
Changes to Isa limits have made it easier for people to keep more money in cash. In 2014, the rules around Isas were relaxed, allowing people to put bigger amounts into cash Isas.
By 2016-17 savers could put all of their £15,240 Isa allowance into cash and in 2017-18 savers will be able to put up to £20,000 per year into a cash Isa.
The new Lifetime Isa is also set to launch in April, to help the under-40s save towards a deposit for their first home or their retirement, which could further fuel the appetite for money being held for long periods in cash, the report said.
Trevor Greetham, head of multi asset at Royal London, said: "Isas are increasingly being used as part of a long-term savings strategy alongside pensions, but holding cash is not a sensible option when interest rates are close to zero and inflation is on the rise. In the short run, cash is safe but in the long run it is risky."
Before the Isas shake-up in 2014, savers could only put up to half of their total annual Isa allowance into cash, and the remainder would need to go into stocks and shares.
Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said a separate, lower limit should be reinstated for the amount that can go into cash Isas, "to protect investors from the risk of seeing their savings eroded by inflation".
The limit for cash could be perhaps around a quarter of the overall annual Isa limit, he said.
A Treasury spokeswoman said: "The Government is committed to helping people to save and invest.
"We have made Isas more generous and have provided savers full flexibility over how much of their Isa allowance to save into a cash, stocks and shares, or innovative finance Isa each year.
"It is right that savers have a range of options so that they are able to make the decisions that are best for them."