Why we’re £36 billion worse off
As the real term value of Brits' cash plummets, we look at options to safeguard your savings.
Brits are losing more than £36 billion every year thanks to the corrosive effect of inflation on our savings, research by accountancy firm UHY Hacker Young has found.
According to the data, more than £110 billion is currently held in accounts that do not pay any interest and on average people are seeing a return of just 1.6% on their money.
This figure is well below the levels of UK inflation announced this week – 4.5% for the Consumer Price Index and 5.2% for the Retail Price Index.
What can you do?
If you want to protect your savings against the rising cost of living, you could consider an index-linked savings option.
Related links
National Savings and Investments (NS&I) offers a five-year bond that guarantees to pay 0.5% above inflation as measured by the Retail Price Index. In another major plus point, interest on these bonds is tax-free unlike the vast majority of savings products.
Although index-linked bonds ensure the value of your savings will not decrease in real terms, locking your money away for five years could prove risky. If banks and building societies raise rates on other savings options during this time, you may find yourself stuck with an uncompetitive rate.
If you need access to your cash
If you need to dip into your funds from time to time, you might want to opt for an easy access savings option.
Santander’s eSaver (Issue 3) pays 3% for one year and you can invest from as little as one pound with unlimited access. Note, however, the interest rate will drop to just 0.5% after one year.
Likewise, Nationwide’s MySave Online Plus pays a slightly higher 3.05% but only permits one penalty-free withdrawal per year.
Although these accounts do not beat inflation, they are nevertheless preferable to the average 1.6% return identified by UHY Hacker Young.
Alternatively, you could find a decent return with a high paying current account. Santander pays 5% on current account deposits of up to £2,500 for 12 months in addition to a £100 welcome bonus. After a year has elapsed, the rate drops to just 1%.
Avoid unnecessary tax
Before exploring other savings options, it is worth ensuring you have made the most of your annual tax-free ISA allowance. During the current tax year, you can invest £10,680 before you start paying tax on the interest – £5,340 as a cash ISA.
The AA offers one of the most competitive cash ISAs on the market with a return of 3.35% for one year on a minimum deposit of £500. However, the return will drop to 1.7% after 12 months so it could be worth moving your savings at this point.
What are my other options?
Related links
If you are a homeowner, you could consider making an additional payment on your mortgage in order to lower the overall balance and save money in the longer term.
Although every mortgage provider has different rules regarding overpayments, many will allow you to overpay by 10% each year before imposing a penalty. However, it is vital you check your provider’s policy to avoid any fees or penalties.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
