How to protect your savings against inflation, as typical saver loses 9% in real terms


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Real-terms savings returns have plummeted to their lowest level since February 1976, with inflation eating away almost 9 per cent of the typical rainy day fund last month.  

The real annual return on savings fell to -9 per cent in July, according to a study by mutual Scottish Friendly and think tank the Centre for Economics and Business Research (Cebr).

A slight increase in average savings rates meant smaller annual falls in August and September, but these still amounted to real-terms drops of -8.8 per cent and -8.9 per cent respectively.

Silent killer: While interest rates on savings accounts might make it seem like the value of your account is increasing, inflation could be causing your savings to lose value in ‘real terms’

Consumer Prices Index inflation rose again to 10.1 per cent in the 12 months to September, marginally up from the 9.9 per cent recorded in August.

It means that consumer prices are rising by more than five times the Bank of England’s long-term target of 2 per cent.

Meanwhile the average easy-access savings rate was only 0.85 per cent at the start of September, according to Moneyfacts data.

The Scottish Friendly and CEBR study estimated that the average UK household saved just £17 a week between July and September, as inflation remained high.

This represented an annual fall of 74 per cent, with the average household thought to have saved £66 per week during the same period last year.

To offset the impact of inflation, households would have to earn an extra £59 a week before tax or spend £49 a week less to be able to save at the same level as this time last year.

An estimate of weekly savings for average UK household between 2018 and now.

An estimate of weekly savings for average UK household between 2018 and now.

How much has inflation eroded savings? 

According to This is Money’s historic inflation calculator, which uses the longer-running Retail Price Index measure of inflation rather than the Consumer Price Index, inflation has risen by 795 per cent between 1976 and now.

The calculator tells us that someone with £100 back in 1976 would need £894 today to have the same purchasing power.

The CEBR and Scottish Friendly Study modelled estimates of the average monthly interest rate on instant access savings using Bank of England data to compare how typical savings deposits have grown over time. 

It found that a deposit of £100 in 1976 would be worth £1,067 in nominal terms today. This equates to growth of nearly 970 per cent.

However, with inflation accounted for, the real return on savings between 1976 and today falls to just 67.3 per cent. This equates to a total of only £167.30.

That would mean that the average easy-access saver with interest compounding monthly, would have benefited from a real term rate of about 0.35 per cent over that time, with inflation factored in.

Easy-access returns: This graph illustrates the real annual return on instant access accounts between 1966 and 2022

Easy-access returns: This graph illustrates the real annual return on instant access accounts between 1966 and 2022

For more than a year now, the rate paid on savings has remained below the CPI, meaning savers are actually losing money in ‘real’ terms.

There isn’t currently a single savings product on the market that gets anywhere close to matching the 10.1 per cent rate of inflation.

Even though savings rates have been increasing substantially in recent months, the best savings deals still fall woefully short. The best easy-access rate is 2.81 per cent, whilst the best fixed rate pays 5.1 per cent. 

Kevin Brown, savings specialist at Scottish Friendly, said: ‘The combined effect of rising inflation, stagnant wage growth and low interest rates means savers have been incredibly hard-pressed over the past year.

‘These conditions created a perfect storm for savers that resulted in real returns falling to a 46-year low.’

Although real returns remain low, saving levels are expected to gradually improve following the announcement of the Energy Price Guarantee – despite the fact the Government bill-capping scheme has now been scaled back. 

The energy price guarantee stopped the Ofgem energy price cap rising to £3,549 for the average household on 1 October and limited the rise to £2,500 for the average household.

It was originally put in place for the next two years, but this has been cut back to only next April by new Chancellor Jeremy Hunt.

Prior to the policy initially being announced, it was forecast that the amount of money that households would have available to save as a percentage of their disposable income would fall sharply over the next 12 months to a low of 1.9 per cent.

But Scottish Friendly and the CEBR have now predicted that this ratio will rise to 6.9 per cent in 2023, as a portion of households’ foregone expenditure on energy bills is expected to be saved – at least until April next year.

CPI inflation now at 10.1%: It means consumer prices are rising by more than five times the Bank of England's long-term target of 2 per cent

 CPI inflation now at 10.1%: It means consumer prices are rising by more than five times the Bank of England’s long-term target of 2 per cent

Brown adds: ‘Although the situation remains dire, the outlook is a little brighter after the Government took action to help people cope with rising energy bills, which is set to limit the previously forecasted peak of inflation.

‘As interest rates continue to rise, households should be encouraged to save, but it is important to think about how best to protect their money from the eroding effects of inflation while it remains elevated.

‘Saving in cash is important in case of emergency or to help meet rising energy bills, but in the current climate, our money has to work harder to keep up with rising living costs.

‘Plus, savings providers can be slow to pass on interest rate rises to customers. With that in mind, possibly the best way to make your savings work harder over the longer term could be through the growth potential of an investment Isa.’

How can savers fight the effects of inflation?  

Anyone who is able to put their money away for five years or more should consider investing to try and maximise their returns and outperform inflation.

But investing with a shorter timeframe than that is not usually recommended as there is a higher risk of losing money, so those who think they will need the cash sooner may have little choice but to stick with savings accounts.

In the face of inflation, it is easy for savers to give up caring about how much interest their bank or building society is paying them.

However, getting the best interest rate possible can at least limit the damage in the short term.

Investing: Those who are able to save or invest for the long term might be better off turning to the stock market to try and outperform inflation

Investing: Those who are able to save or invest for the long term might be better off turning to the stock market to try and outperform inflation

For those who want to have unlimited access to their money, perhaps to help cover rising bills like energy, mortgage, travel and food costs, the best paying easy-access deals now pay almost 3 per cent.

Al Rayan Bank pays 2.81 per cent* for example, Yorkshire Building Society pays 2.5 per cent*, whilst Paragon* and Shawbrook Bank* both pay 2.3 per cent.

Those who already have a sufficient emergency fund in place may want to consider putting any excess cash into a fixed rate deal. 

Fixed-rate savings offer the highest returns. The best one year fixes pays 4.6 per cent – courtesy of BLME and RCI Bank whilst the best two-year fix pays 5 per cent, again courtesy of BLME.

Free investing guides

The BLME deals are available via Hargreaves Lansdown’s free savings platform.*

Savers signing up for the first time to Hargreaves Lansdown’s platform, Active Savings,* can now earn up to £100 as a cash bonus.

The amount of cashback savers will receive will depend on how much they put in. For example, those putting £10,000 in will secure £20, whilst those putting in £80,000 will secure £100.

To benefit, savers will need to open an account by 30 November and deposit at least £10,000 into any of its savings deals within 60 days.

Those who can afford to stash their savings away for five years or more should think about topping up their pension, or investing in a stocks and shares Isa.

To help you compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account.

We highlight the main players in the table below, but would advise everyone to do their own research when considering the points in our full guide.

>> This is Money’s full guide to the best investing platforms and Isas.

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