It has been described as a ‘leaking bucket’
A leaking bucket
Some savers have potentially lost around 19p per £1 saved in real terms since 2020, due to the eroding impacts of inflation outpacing savings rates, according to analysis. Even those putting their money away into the most competitive cash savings deals may have seen the real value of their pots decrease, according to calculations made for the journal Interest from Moneyfacts.
It said that, based on average easy access deals, savers may have lost around 19p per £1 saved, while even based on the top-paying easy access accounts, savers may have lost around 5p per £1 saved. In some cases, savers may have beaten inflation. Money held in the top one-year fixed-rate accounts could have left savers around 1p per £1 saved better off, according to the calculations.
The conflict in the Middle East has prompted concerns about inflation risks and the impacts on household bills in the months ahead. This could make it even more important for savers to shop around for the best deal for their needs, to make sure their cash is working as hard as possible.
Adam French, head of consumer finance at Moneyfacts, said: “Many savers have already lost up to 19p per £1 saved in real terms since 2020 as rising costs have consistently run ahead of the rates paid on cash savings. And now another financial storm is coming with inflation forecast to spike again.”
He added: “Many savers either building their fundamental cash buffers or looking to put a lifetime of savings to use have found their progress undermined. Rates were too low for too long in the 2010s and then slow to catch up with the inflation shock of the 2020s. The result is that many cash savers were left materially worse off.”
Mr French continued: “If cash savings quietly lose value year after year, households are less likely to feel secure enough to spend or invest. While central banks are rightly focused on inflation, prolonged periods of negative real returns risk undermining financial confidence at a household level.
“Instead, savers are often left topping up what can feel like a leaking bucket. For savers, the interest rate is only half the story. If returns don’t at least keep pace with inflation, the real terms costs can slowly pile up and take years to undo.”
Four suggestions from Mr French and Moneyfacts to help savers:
1. Bag best rates, not average ones.
There is a big gap between average and “best buy” accounts.
Switching from an average easy-access deal to a top-rate product can materially reduce the erosion. Consider regularly reviewing and switching your account if needed.
2. Consider blending easy access accounts with fixed-rate ones.
If you have a healthy nest egg saved, you could consider splitting cash by keeping an emergency fund as a buffer in an easy-access account but locking another portion into a competitive fixed or notice account to improve overall returns.
3. Make the most of the Isa tax wrapper.
Shielding the interest earned from tax helps maximise net returns. Even small tax savings can narrow the real terms loss.
4. Consider other options with potentially higher returns.
Investing in a stocks and shares Isa could be an option for some people, although this depends on risk tolerance and financial plans. The value of investments can go down as well as up.
