Is inflation having a negative impact on savings?

Despite a marginal fall in the Consumer Price Index (CPI) measure of inflation from 2.8% in July to 2.7% in August, inflation still continues to sit above the Bank of England’s target rate of 2%.

This has meant that savers across the length and breadth of the country have struggled to find an inflation-beating savings account that helps them make the most of their investment. Recent research published by

facts has argued that inflation is dealing a hefty blow to consumers’ saving potential, arguing that an investment of £10,000 made five years ago would only be worth £8,844 in the present day.

The site went on to argue that the situation was so dire that just three of the 840 ISA and non-ISA accounts currently counteracted the effects of tax and inflation.

Savers facing stagnation rather growth

Moneyfacts editor Sylvia Waycot argued that inflation’s deteriorating effect on savings has mean that many savers are seeing their savings pots stagnate rather than grow.

“Inflation may have fallen but it is still high enough to ruin the spending power of any feeble interest paid on today’s savings accounts, which leaves the elderly reliant on savings income and the young saving for a house deposit high and dry,” she said.

“It is time to start calling savings accounts by a different name as ‘savings’ suggests growth and the reality is one of stagnation.”

The site argues that basic-rate tax payers would need a savings account paying 3.8% to beat inflation, while a higher-rate taxpayer would need an account paying 4.5% – what could be a considerable challenge considering some of the top savings accounts pay a rate of around 3%.

Savers stuck in a quandary

As consumers see their savings dwindle in the face of above-target inflation, many are stuck in as quandary as to whether to stick with the current savings strategy or opt for something new.

This view is shared by Patrick Connolly from adviser Chase de Vere. He said: “The dilemma for these individuals is whether to accept that the spending power of their money is continuing to fall, or whether to take more risk in the hope of generating better returns.

“The most cautious should remain in cash, regularly reviewing their accounts to ensure they are earning competitive rates.”

He goes on to argue that the best way to stay one step ahead of inflation is to have a diverse portfolio of investments which could include cash, equities, fixed interest and property.

UK entering “age of unretired” as savings fall

The recent the Global Future of Retirement Survey from HSBC revealed that the UK is entering the “age of the unretired”. The survey of more than 16,000 people across the globe revealed that almost a fifth (19%) of those in the UK feel that they won’t have sufficient funds in their savings and pensions to stop working.

Around one in three also argued that they will only come to terms with their savings shortfall once they have retired.

The findings have prompted a call from the Association of Christian Financial Advisers (ACFA) to introduce a greater rate of tax relief on consumers’ savings.

What are the best savings accounts currently on the market?

In order for savers to achieve the greatest rate of interest on their savings, it seems that they will need to lock their money away for longer.

Topping the table for 5-year fixed-rate cash Isas, for those who have yet to use up all of their £5,760 cash ISA allowance for the current tax year, is the Leeds BS Five-year Fixed Rate Isa – No Access offering a rate of 3%. The account requires a minimum deposit of £1.

This is followed by the Skipton BS Fixed Rate Isa, also offering a rate of 3%, but requiring a higher minimum deposit of £500.

Sitting at the top of the best buy tables for 5-year fixed-rate savings accounts is the Secure Trust Bank Five-year Fixed Rate Bond offering a rate of 3.01%, with a minimum deposit of £1,000. Sitting just below this is the Leeds BS Five-year No Access Bond offering a rate of 3% and requiring a minimum deposit of £100.

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Posted by: Jessica Odell Categories: Finance, Savings Tags: , , Comments Off on Is inflation having a negative impact on savings?

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