Cash savings remain king for Brits despite inflation erosion

03 February 2023

New research from Quilter, the financial adviser and wealth manager, has found that nearly half of all Brits (45%) consider growing their cash savings (e.g. cash savings accounts and cash ISAs) to be their top financial priority over the next five years, but with inflation running at 10.5% they could suffer a real terms loss.

Today the Bank of England increased its base rate by a further 0.5%, taking it to 4% - the tenth consecutive rate rise and the highest level since 2008. While this will have a positive knock-on effect in terms of the interest rate on cash savings, if an account is only paying a savings interest rate of 4% then a loss of more than 6% will be made in real terms and will make it much more difficult for people to meet their financial goals.

The research, with 2,000 UK adults, also identified several other key financial priorities for the next five years. Worryingly, growing investments was among the lowest priority despite ‘managing how inflation affects my finances’ sitting among the highest.

Base: All UK adults with financial concern for others

While the UK appears to be moving past peak inflation, the latest ONS data show it remains at a 40-year high of 10.5%.

According to the Bank of England inflation calculator, goods and services costing £1,000 in 2020 would have cost £1,119.22 in 2022. If your money had been sat in cash during that time, it would not have had the opportunity to grow, and your purchasing power would have been diminished significantly as a result.

The rising cost of living is already having a significant impact on people’s everyday finances. Recent data from the Office for National Statistics (ONS) showed nearly half of UK adults (45%) said they were finding it difficult to afford their energy bills, while 30% said it was difficult to afford their rent or mortgage payments.

While the ongoing crisis may have forced people to dip into their cash savings buffer, it is important to move on from cash savings as soon as possible once an adequate amount has been saved so as not to risk losing out.

Once you have a cash buffer in place, if you are willing and able to leave your money untouched for at least five years, investing across a diversified range of assets is the best way to ensure your money grows and has a better chance of beating inflation.

Someone who saved £10,000 into a cash savings account which grew in line with the Bank of England Base Rate would have seen their money grow to just £10,325 after five years. Comparatively, had the money been invested in a balanced investment portfolio (IA Mixed Investment 40-85% Shares) it would have grown to £11,474 – a cumulative return of 14.74% over the five years, and well above even the current high levels of inflation.

While nearly half of people say building their cash savings is their number one financial priority for the next five years, the research also found that 24% of people with financial concern for others have stopped saving in general due to the rising cost of living, and 6% said they had stopped saving money for their children or grandchildren.

The ongoing cost-of-living crisis is putting significant strain on people’s everyday finances, but it is still important to continue building your savings wherever possible. While topping up savings for the younger generations of your family may not be possible when finances are stretched, your own investments could be passed to them in the longer term so it is important to look ahead to the future when choosing where is best to save.

Andy Miller, lead investment director at Quilter, says:

“It is good to see that growing savings is a priority for so many people, but the way in which they are saving requires careful consideration. Cash savings are certainly important to have to fall back on should you need it, but at a time of very high inflation they will be rapidly eroded in real terms. As such, where possible people should consider investing for the longer term to have a better chance of growing their money rather than seeing their savings being depleted.

"While it is understandable that savers may be cautious with their money, investing need not be scary. Investing does of course carry its own risks but a well-structured and well diversified portfolio that is managed sensibly ought to protect capital from inflation and the decline in purchasing power over time. Seeking professional advice might also be sensible so that individuals can have an investment portfolio built for their needs without having to spend lots of time researching the whole of the investment universe for appropriate investments.

“While the news following the Bank of England’s decision focuses on rising rates, at present according to Moneyfacts the average easy access Cash ISA interest rate currently stands at just 1.85%, meaning that when you take into account inflation, savers will actually lose money in real terms.

“Not only will investing help build your finances for your own benefit, but if you are keen to pass money on to your loved ones in the future – whether in life or after you pass away – investing can be an excellent way of ensuring that your money grows and that as much as possible is available to support your loved ones when the time comes.

“Ultimately, if you are looking to beat inflation then it is important to recognise that cash savings simply won’t do it. Where possible, you should seek professional financial advice to ensure you are making the best possible decisions for your circumstances and future goals – for yourself or for the younger generations of your family who have longer to invest.”