Protecting savings from soaring inflation and living costs

Record inflation rates mean savers risk losing up to a third of the value of their savings if they keep them in a high street bank account for ten years. Interest rates on high street easy access savings account are reaching 0.67%, still 2.43% below the rate of inflation.

Royal London, the UK’s largest mutual life, pensions and investment company, compared the growth of the average savings amount of £10,000¹ spanning over five years, ten years and fifteen years. The analysis compared two savings and one investment vehicle; a pension pot, a high street savings account and a Cash ISA.

The figures show that the purchasing power of savings left in a high street savings account will decrease over time as inflation increases; if inflation rises to 4%, the purchasing power over ten years will fall by more than a quarter (27%), and if inflation reaches 5% over ten years, you would lose over a third (34%) of the “real value” of your money. While the Bank of England is tasked to keep inflation at 2%, a sudden deluge of spending or continued problems with the supply chain could keep the rate well above target.

If inflation reaches average levels of 4% next year and stays at this level over five years², it will reduce spending power by as much as £1,500, whilst saving in a pension pot over the same period could help grow the money by £320. The money would also lose more than £1,300 in purchasing power if kept in a Cash ISA for five years.

The Office for Budget Responsibility recently predicted that inflation would peak at around 5% next year. Royal London’s figures show that if inflation does rise to this level and stays there, you would lose almost half (47%) of the “real value” of your money after 15 years in a high street savings account³.

If savings were kept in a high street savings account, for ten years against a 5% inflation rate, the purchasing power of the savings would decrease by a third (34%) to £6,564.00, If the savings were instead kept in a Cash ISA paying 0.96% over this period, they would also lose a third (32%) of their purchasing power, reducing to £6,757.00.

See tables below:

Commenting, Sarah Pennells, consumer finance specialist at Royal London, said:

“If you have money in savings, it is important to keep an eye on interest rates and where your money is saved. Rates are lower than ever and you will lose money if inflation is higher than the interest rate offered on your savings account or cash ISA. You can reduce the effects of inflation by making sure your savings are in a ‘best buy’ account, and not one languishing at the bottom of the league tables.

“However, we also know that many people don’t save enough for the kind of retirement lifestyle they’d like. And – while returns aren’t guaranteed – you may be better off putting some of your spare cash into your pension, especially if you will also get a contribution from your employer. It’s important to have an emergency savings fund, so don’t top up your pension if you have no savings to fall back on.

“If you do want to keep your money in cash, be careful to do your research and check the terms and conditions of the account. An increasing number of banks are adding restrictions to the best savings deals, including penalties for making too many withdrawals and short-term bonuses⁷ that make deals appear more attractive than they really are - unless you remember to switch.”