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Cash savings could be costing the UK £4.1billion a year

UK savers are forecast to lose £4.1billion over the year from their cash savings as inflation erodes the £1.2 trillion they have stuck in low interest rate bank accounts and ISAs.

£167 billion is currently being left in accounts which pay absolutely no interest at all and another £265 billion is locked up in cash ISAs that pay an average of only 1.34% per annum.

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Real value of savings diminishes

Average interest rates on cash savings lag behind the Bank of England’s forecast inflation rate over the next 12 months.1 This means that UK savers, choosing to leave their money in cash, are actually seeing the value of those investments being ground down month by month.

The net interest that savers would make from conventional bank accounts will be eroded even further by the tax they have to pay on that interest income. Savers who park their wealth in low interest accounts run the risk of sabotaging their long-term saving prospects.

Are you losing out by saving in cash?

Under-saved population

Long-term savings are, in many ways, the elephant in the room for much of the UK. As a nation we face a £9 trillion savings gap2 and the lowest savings ratio for more than 20 years.

When thinking of the future young savers should be aiming to put away 12% of their annual salary.3 Looking at ONS figures the reality is just 4.9% of household income is left after monthly expenses. These figures don’t begin to look at the figures older savers should be looking to hold back; with a lower state pension and a farewell to defined benefit pension schemes the amount we save ourselves and our wealth appreciation is becoming more and more important.

Can we rely on tightening our belts and cash accounts to provide for our futures?

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Investing to beat inflation

The low returns offered by current and savings accounts and cash ISAs means it is vital for savers to seek out investment alternatives, in order to avoid seeing their savings decline in value even further.

The recent correction in the stock market does allow investors the opportunity to start accumulating shares at a lower price.

While strategies which have historically offered higher returns, such as stocks and shares ISAs, may go through periods of volatility, that should be less important for medium and longer-term investment.

With inflation looking to rise over the coming months, it is imperative that savers consider whether a zero growth investment policy is best for them.

Account type Total money in UK accounts Interest rate on these amounts Interest paid on these accounts
Non-interest bearing £167.4bn 0.00% £0m
Current £594.3bn 0.78% £4.6bn
Savings £187.9bn 1.46% £2.7bn
ISA £264.9bn 1.34% £3.6bn
Total £1,214.5bn average – 0.90% £10.9bn
Total value destroyed
by low interest rates
£4.1bn

1 Bank of England Forecasts of Annual CPI Inflation Q2 2016-Q1 2017, CPI 1.24%
2 2014 ONS Data
3 Scottish Widows

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