The real returns on cash savings

23/07/2019

When we save or invest money, a common goal is for it to grow faster than prices are rising, or at least as quickly. This is because we know that inflation erodes the value of cash – in other words, reducing what can be bought with a £1 coin or £20 note over time.

Glossary

For explanations of the investment terms used throughout this article.

View the glossary

Beating inflation can be easier said than done, however. Since the financial crisis, interest rates on bank savings have been at or near record lows, meaning cash savers have often not been rewarded for their prudence.

Despite the Bank of England raising base interest rates from their record low of 0.25% since 2017, this looks unlikely to change quickly.

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Past performance is not a guide to future performance.

For most of the past decade, cash savings have typically lost value after we factor in the effect of rising prices.

By looking at the average interest rates on cash savings, as offered by UK banks and buildings societies, we see that they only surpassed inflation – as measured by the Consumer Prices Index (CPI) – in barely 24 months since January 2011.

Cash has its place

Keeping a cash buffer for contingencies is always sensible, and saving in cash can be the most appropriate choice if you’re unwilling to take any investment risk. Unlike other investments, where your capital will be less secure, savings of up to £85,000 held in banks or building societies are protected under the Financial Services Compensation Scheme.

It is important to remember, however, that relying excessively on cash savings could prevent you from achieving your long-term financial aspirations. This is especially true at a time when inflation continues to outpace interest rates, eroding what cash is really worth.

A checklist for savers

  • Check the interest rate on your cash savings – how does it compare to inflation?
  • Evaluate how you allocate your savings – are you over-relying on cash to realise your
    long-term goals?
  • Consider the full range of options – could putting some, or more, of your savings in
    investments such as bonds, company shares or property be a better way to put your money
    to work?

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.

When you're deciding how to invest, It is important to remember the value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.