The amount pouring into UK cash accounts has skyrocketed by 89% in the last year to a record £66.6bn, up from £35.2bn in 2014/151. Whilst it is fantastic to see that so many are putting money away are UK savers risking the real value of their savings?
Inflation eroding cash savings
UK savers choosing to keep money in cash accounts risk seeing their savings decline in real value over time as a result of the recent interest rate cut to 0.25%.
Inflation increased to 0.6% in July, this was much faster than expectations, and is the highest rate since November 20142. Inflation is forecast to be as high as 3-4% by the second half of 20173.
What does this mean for British savers? It means they won’t be able to buy as much with their hard-earned cash. Many cash savings accounts have slashed interest rates and you’re now lucky to get as much as 1.5% in interest each year.
That means if you put away £100 now it would be worth £101.50 in a year, but inflation hit 3% so it will actually feel like you’ve lost £1.50. Whilst £1.50 doesn’t sound like a lot when you amplify this to £100,000 of savings it’s £1,500. That’s quite a nice holiday that you’ve lost.
Time to start investing your savings
In order to achieve higher returns, UK savers need to look at investing their savings rather than storing it in cash accounts. Cash savers are set to see their savings underperform and will find themselves worse off in the long-term.
The interest rate change ensures that savers will suffer for playing it safe – although savers may view storing their money in cash accounts as the sensible option, in reality cash holders are set to be punished by the interest rate cut.
In the current economic landscape, cash savers will see almost zero returns and actually lose money over the long-term. Therefore, savers need to start looking at other kinds of investment, such as a blend of bonds and equities.
Three things to look out for when investing
If you do decide that you’re tired of the poor returns offered by cash accounts and want to try and achieve inflation beating returns, it’s time to consider investing. But other than being aware that the value of your initial investment can go up as well as down you also need to watch out for:
- High fees will eat into your returns and 4% can very easily become 2.5% as a result of charges.
- When your money is in cash you can often access it instantly. It can take a little longer to access your money when it is invested. But providers, such as Moneyfarm, allow you to get your money in as little as three working days.
- Make sure you know exactly what you’re getting. Your investment provider should be happy to provide you with a full break down of what you have in your portfolio.
1 Analysis of Bank of England statistics.
2 Figures from the Office of National Statistics.
3 According to JPMorgan Asset Management.