Inflation will wipe out £184billion of the UK’s cash savings in real terms this year even after interest is added, according to new research.
This is double the amount ‘lost’ to inflation in 2021, and sets a new all-time record, according to research from Janus Henderson Investment Trusts.
The £184billion figure is also more than the total value of UK savings lost to inflation in the 12 years from 2009 to 2020 combined.
Fresh CPI inflation data is set to be announced tomorrow, and it is forecast to exceed its current level of 10.1 per cent.
Negative returns: Inflation will blow a record £184bn hole in the nation’s savings accounts this year, according to Janus Henderson, double the previous record set last year
At present there is not one single savings rate that gets close to the rate of inflation, meaning savers’ money is losing value in real terms.
Last month, annual inflation, as measured by the consumer prices index (CPI), came in at 10.1 per cent – a long way off the Bank of England’s inflation target of 2 per cent.
Meanwhile the average easy-access savings deal currently pays 1.16 per cent, according to Moneyfacts, whilst the average one-year fixed rate savings deal pays 3.29 per cent.
Janus Henderson compared cash savings balances and savings interest rates data from the Building Society Association which sources them from the Bank of England.
It found that if the UK’s £1.9trillion of savings were evenly spread around the UK’s households, 10.1 per cent inflationary erosion would have cost every family £6,706 this year.
Of course, savings are not evenly spread, but the typical household with a cash Isa will nevertheless see inflation erode £1,087 from their savings, based on ONS data.
However, some wealthier households will have seen inflation destroy tens of thousands of pounds of their savings this year.
Savings vs inflation: While interest 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’
Is investing a better bet?
This year has been a torrid ride for most investors, and stock markets have on the whole been losing people money.
Despite rallying recently, the FTSE 350 remains down almost 5 per cent, whilst the US Nasdaq is down almost 30 per cent.
The MSCI World, a shares index that represents large and mid-cap companies in 23 developed markets, had lost 9.2 per cent by the end of September, taking the index back to the level of June 2021.
Among major financial assets, only gold has just about kept its value in pound terms this year after accounting for inflation.
However, according to Janus Henderson, 2022 has been a historically unusual year.
It is set to be one of only four years in the last 20 in which shares have performed worse than cash savings.
This means that investing outperforms cash over the long term. For example, £1,000 invested in the MSCI World Index 20 years ago would be worth £7,036 today, compared to £1,391 for cash, it said.
Even those who invested in October 2007 before the global financial crisis would have seen a £1,000 nest egg rise to £3,837 today. Cash deposited at the same time would be worth £1,170 today.
No pain no gain? Stock markets have fared poorly in 2022, but this is a rare bad year, according to Janus Henderson
Dan Howe, head of investment trusts at Janus Henderson Investors said: ‘2022 has seen savers caught in a pincer movement between soaring inflation and weak stock markets.
‘Times of market upheaval naturally make people anxious – nobody likes to see the value of the shares they own fall.
‘But the bear only roars intermittently while inflation is a constant foe, consistently destroying the purchasing power of our cash nest eggs.
‘Right now, interest rates are on the up and this may tempt savers to keep their money sitting in cash, but history suggests their savings will fail to keep pace with inflation, and even more importantly, it shows they are likely to fall far behind stock-market returns over time.
‘Over the last 20 years, we have endured periods of great market turmoil, like the global financial crisis or the pandemic lockdown, and yet stocks have still outperformed cash nearly sevenfold.’
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 are advised to stick with savings accounts.
Getting the best interest rate possible can at least limit the damage of inflation in the short term.
Choose carefully: Those who are in savings would be best ensuring their cash is with the best paying providers
For those who need 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 between 2.5 per cent and 3 per cent.
Easy-access savings will typically enable savers to access their funds as and when they need, though some still come with restrictions so always check the small print.
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 without the risk that comes from investing. The best-paying one-year fix pays 4.4 per cent, the best two-year fix pays 4.85 per cent whilst the best three year fix pays 4.9 per cent, for example.
However, anyone who can afford to stash their savings away for five years or more should consider investing. This could mean topping up their pension, or investing in a stocks and shares Isa.
For those who are nervous about investing in one lump sum, setting up a direct debit and spreading their contributions over a period of time will help to reduce the risk of mis-timing the market.
Dan Howe adds: ‘Investing early and regularly, no matter how big or small the amount, affords investors a time-horizon that can help them manage the challenges of market shocks.
‘Cash is vital for our immediate needs, but it’s an expensive trap for long- term savings.’
To help compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing platforms.
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.
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