Rising inflation and low interest rates have combined to deplete Brits’ savings, new research has found.
According to a study by comparison site Finder, savers have typically lost more than £1,000 in real terms over the last five years thanks to inflation.
It found that typical easy access savings accounts have lost 13.5 percent of their value against inflation since this point in 2017.
Silent Killer: While interest rates on savings accounts make it appear like the value of your account is increasing, inflation could cause your savings to lose “real” value.
According to Finder, the average Brit currently has around £7,500 in savings.
Someone who saved £7,500 in readily available savings in June 2017 would normally find their pot worth £1,012 less in real terms today.
Because although the £7,500 may have risen thanks to interest earned, overall purchasing power will have fallen due to rising prices.
Inflation hit 9.4 percent in the 12 months to June, the highest in 40 years, and the Bank of England expects it to peak at around 11 percent in the autumn.
There isn’t a single savings business that currently beats inflation, and according to Finder, rising prices have outpaced the average saving rate in each of the last five years.
However, this year people’s savings have been hit the hardest by the runaway inflation rate, compared to the average accessible savings rate of just 0.59 percent.
| Savings balance 2017 | Depreciation after inflation & average savings rate |
|---|---|
| £5,000 | £675 |
| £7500 | £1,012 |
| £10,000 | £1,350 |
| £20,000 | £2,700 |
| £50,000 | £6,750 |
| £100,000 | £13,500 |
This means that inflation is currently almost 16 times the average easily accessible savings rate.
If this were to continue for the rest of the year, a typical saver with £7,500 in the bank would effectively lose 8.8 per cent or £660 in 2022 alone.
The best easy-access offer currently pays 1.6 percent. However, this is almost six times lower than the current inflation rate of 9.4 percent.
Someone saving in such an account could still expect the value of their savings pot to fall by £585 in real terms.
Savings misery: If the average UK saver put £7,509 into a savings account in 2017, the account has now lost over £1,012.
Savers can get better protection by turning their money into a fixed-rate savings deal – although it means they have to give up their money whenever they want, at least for a period of time.
According to Moneyfacts, the best fixed rate savings deals are now paying twice as much as they did a year ago.
The best one-year contract offered by Gatehouse Bank currently pays 2.75 percent.
Someone who puts £7,500 into this account could expect to lose £499 in real terms – if inflation stayed at 9.4% over the next 12 months.
Go back 10 years and the picture doesn’t improve much either. Someone who saved £7,500 in 2012 would currently have lost around £950 in real terms, or 12.6 per cent of the value of their savings.
Interest rates on savings accounts have fallen significantly since 2008.
Between 1980 and 2008 interest rates did not fall below 3 percent. However, they have not reached that number since 2009.
Savings have fallen significantly since before 2009: between 1980 and 2008, interest rates did not fall below 3 percent. However, they have not reached that number since 2009.
Michelle Stevens, banking expert at Finder, said: “The fact that savings accounts are losing a lot of money in real terms is another worrying outcome of the cost-of-living crisis.
“Given the security they offer and the fact that they still earn you interest, they’re still a prudent choice for many consumers, but it may not be a sustainable option for many unless inflation comes down soon.”
Panicked savers might consider turning to the stock market and other forms of investment to try to bridge the gap — but Stevens says doing so could only lead to more pain — at least in the short term.
“The bear market – which many are predicting will get worse – also does not inspire confidence in decisions such as investing or cryptocurrencies.
‘The potential for returns that beat inflation also comes with the possibility of losing some or all of your money.’
According to Finder, inflation in June 2022 is almost 16 times higher than the average savings account rate.
Stevens suggests savers consider topping up their pensions or, if they’re under 40, using a lifetime Isa, both of which come with tax hikes.
Savers under 40 can open a Lisa and by the time they reach 50 the government will give £1 for every £4 they save and give a £1,000 bonus on top of the maximum £4,000 a year they can save.
However, Lisa clients won’t be able to spend the money until they’re 60 unless they’re using it to buy their first property, valued at up to £450,000. After the age of 60, they can spend it however they want.
Stevens adds: “One option to protect your money for those under 40 is to purchase a lifetime Isa.
“A Lifetime Isa offers a guaranteed return of 25 per cent – up to £1,000 a year – but it must only be used to buy a first property or taken out after reaching 60 years or the interest on the account will be forfeited.
“Also, putting more into your pension pot might be another option as you get employer contributions and tax breaks from the government.”
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