Inflation set to wipe out £184billion of UK savings this year

Inflation will wipe out £184bn of cash savings in the UK this year in real terms, even after adding interest, according to new research.

This is double the amount ‘lost’ to inflation in 2021 and sets a new record, according to research from Janus Henderson Investment Trusts.

The figure of £184 billion is also more than the total value of UK savings lost to inflation in the 12 years from 2009 to 2020 combined.

New CPI inflation data will be announced tomorrow and is forecast to exceed the current level of 10.1 percent.

At present, there is no savings rate anywhere close to inflation, which causes savers’ money to lose value in real terms.

Last month, annual inflation, as measured by the consumer price index (CPI), came in at 10.1 percent – a far cry from the Bank of England’s inflation target of 2 percent.

Meanwhile, the average easy access savings agreement currently pays 1.16 percent, according to Moneyfacts, while the average one-year fixed-rate savings agreement pays 3.29 percent.

Janus Henderson compared cash savings and savings interest data from the Building Society Association, which obtains them from the Bank of England.

It found that if the UK’s £1.9 trillion in savings had been spread evenly across UK households, 10.1 per cent inflationary erosion would have cost each family £6,706 this year.

Of course, the savings aren’t evenly distributed, but the average household with a cash Isa will nevertheless see inflation take £1,087 out of their savings, based on ONS data.

However, some wealthier households will have seen inflation wipe out tens of thousands of pounds of their savings this year.

Is investing a better bet?

This year has been a torrid ride for most investors, and stock markets have generally lost people money.

Despite the recent gain, the FTSE 350 remains nearly 5 percent lower, while the US Nasdaq is down nearly 30 percent.

The MSCI World, an equity index representing large and mid-cap companies in 23 developed markets, had lost 9.2 percent at the end of September, returning the index to June 2021 levels.

Of the major financial assets, only gold has almost held its value in pounds this year, taking inflation into account.

However, according to Janus Henderson, 2022 has been a historically unusual year.

It will be one of only four years in the past 20 where stocks have underperformed savings.

This means that investing outperforms cash in the long run. 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.

Dan Howe, head of investment funds at Janus Henderson Investors said: “In 2022, savers have been caught in a pincer movement between rising inflation and weak equity markets.

“Times of market turmoil naturally make people anxious – no one likes to see the value of the shares they own fall.

But the bear roars only occasionally while inflation is a constant foe, consistently destroying the purchasing power of our cash nest eggs.

Right now interest rates are rising and this may tempt savers to keep their money in cash, but history suggests their savings won’t keep up with inflation, and more importantly, it shows they’re probably well behind will hit stock market returns over time.

“Over the past 20 years, we have weathered periods of major market turmoil, such as the global financial crisis or the pandemic, and yet equities have outperformed cash by nearly seven times.”

How can savers combat the effects of inflation?

Anyone who can put their money away for five years or more should consider investing to try to maximize returns and outperform inflation.

But investing with a shorter time frame is usually not recommended as there is a higher risk of losing money, so those who think they will need the money sooner are advised to stick with savings accounts.

At the very least, getting the best possible interest rate can limit the short-term damage of inflation.

For those who need access to their money, perhaps to cover rising bills such as energy, mortgage, travel and food costs, the highest paying easy-to-access deals now pay between 2.5 percent and 3 percent.

Easy-access savings generally allow savers to access their money as and when they need it, though some still have restrictions, so always check the fine print.

– View the easily accessible savings rates for the best buy here.

Those who already have a sufficient emergency fund may consider putting excess money into a fixed-rate deal.

Saving with a fixed interest rate offers the highest return without the risk of investing. For example, the highest paying one-year fix pays 4.4 percent, the best two-year fix pays 4.85 percent, and the best three-year fix pays 4.9 percent.

– View the best fixed rates here.

For those who prefer to use a cash Isa to avoid paying taxes on the interest they earn, it’s possible to earn up to 4.45 percent with a fixed-rate cash Isa and 2.7 percent with easy access.

– Check out the best cash Isa rates available here.

However, anyone who can afford to put away their savings for five years or more should consider investing. This may mean that they supplement their pension or invest in Isa shares.

For those nervous about investing all at once, setting up a direct debit and spreading their contributions over a period of time can help reduce the risk of mis-timing the market.

Dan Howe adds: ‘Investing early and regularly, no matter how large or small the amount, gives investors a time horizon that can help them overcome the challenges of market shocks.

“Cash is vital to our immediate needs, but it’s an expensive trap for long-term savings.”

To help you compare investment accounts, we’ve got the facts straight and put together a comprehensive guide to choosing the best and cheapest investment platforms.

We highlight the key players in the table below, but encourage everyone to do their own research when considering the points in our full guide.

>> This is Money’s full guide to the best investment platforms and ISAs.