How to protect your savings against inflation, as typical saver loses 9% in real terms

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Real savings have fallen to their lowest level since February 1976, with inflation swallowing nearly 9 percent of the typical rainy day fund last month.

The real annual return on savings fell to -9 percent in July, according to a study by mutual Scottish Friendly and think tank the Center for Economics and Business Research (CEBR).

A slight increase in the average savings rate meant a smaller annual decline in August and September, but these were still -8.8 percent and -8.9 percent in real terms, respectively.

Consumer price index inflation rose again to 10.1 percent in the 12 months to September, slightly above the 9.9 percent recorded in August.

It means consumer prices will rise by more than five times the Bank of England’s long-term target of 2 percent.

Meanwhile, the average low-threshold savings rate was just 0.85 percent at the beginning of September, according to Moneyfacts data.

The Scottish Friendly and CEBR study estimated that the average British household saved just £17 a week between July and September as inflation remained high.

This represented a 74 percent annual drop, with the average household thinking they saved £66 a week over the same period last year.

To offset the impact of inflation, households would have to earn an extra £59 a week before tax or spend £49 a week less to save at the same level as last year around this time.

How much has inflation eroded savings?

According to This is Money’s historic inflation calculator, which uses the longer-term measure of inflation in the retail price index rather than the consumer price index, inflation has increased by 795 percent between 1976 and now.

The calculator tells us that someone with £100 would need £894 in 1976 to have the same purchasing power.

The CEBR and Scottish Friendly Study modeled estimates of the average monthly interest rate for instant savings using Bank of England data to compare how typical savings deposits have grown over time.

It found that a £100 deposit in 1976 would be worth £1,067 in nominal terms. This corresponds to a growth of almost 970 percent.

However, if inflation is taken into account, the real return on savings falls to just 67.3 percent between 1976 and today. This equates to a total of just €167.30.

That would mean that the average saver with a monthly rising interest rate would have benefited at that time from a real interest rate of about 0.35 percent, taking inflation into account.

Savings rates have been below the CPI for over a year, meaning savers are losing money in “real” terms.

There is currently no savings product on the market that comes close to inflation of 10.1 percent.

While savings rates have risen significantly in recent months, the best savings deals still fall woefully short. The best low-threshold rate is 2.81 percent, while the best flat rate pays 5.1 percent.

Kevin Brown, savings specialist at Scottish Friendly, said: ‘The combined effect of rising inflation, stagnant wage growth and low interest rates means that savers have had an incredibly hard time over the past year.

“These conditions created a perfect storm for savers, pushing real yields to a 46-year low.”

While real returns remain low, savings levels are expected to gradually improve following the announcement of the energy price guarantee – despite the government’s bill-limiting scheme now being scaled back.

The Energy Price Guarantee halted the increase in Ofgem’s energy price cap to £3,549 for the average household on October 1, and capped the increase to £2,500 for the average household.

It was originally put in place for the next two years, but this has been reduced to only next April by the new Chancellor Jeremy Hunt.

Before the policy was initially announced, the amount that households can save as a percentage of their disposable income was predicted to plummet to a low of 1.9 percent over the next 12 months.

But Scottish Friendly and the CEBR have now forecast that this ratio will rise to 6.9 per cent by 2023, as some of household spending foregone on energy bills is expected to be saved – at least until April next year.

Brown added: ‘While the situation is still dire, the outlook is a little brighter after the government takes steps to help people cope with rising energy bills, which will limit the previously predicted peak in inflation.

“As interest rates continue to rise, households should be encouraged to save, but it is important to think about how best to protect their money from the erosive effects of inflation, as long as inflation remains high.

Saving cash is important in an emergency or to help cover rising energy bills, but in the current climate our money has to work harder to keep up with the rising cost of living.

‘In addition, savings providers can be slow to pass on interest rate hikes to customers. With that in mind, the best way to make your savings work harder in the long run could be the growth potential of an Isa investment.”

How can savers combat the effects of inflation?

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

But investing on a shorter time frame than that is usually not recommended as there is a higher risk of losing money, so those who think they will need the money sooner may have little choice but to hold savings accounts.

In the face of inflation, it is easy for savers to worry about the interest that their bank or mortgage bank pays them.

However, getting the best possible interest rate can at least limit the damage in the short term.

For those who want unlimited access to their money, perhaps to help cover rising bills like energy, mortgage, travel and food costs, the highest paying, easily accessible deals now pay close to 3 percent.

Al Rayan Bank pays 2.81 percent* for example, Yorkshire Building Society pays 2.5 percent*, while Paragon* and Shawbrook Bank* both pay 2.3 percent.

Those who already have enough emergency fund may want to consider putting excess money into a fixed-income deal.

Fixed-income savings offer the highest return. The top one-year fix pays 4.6 percent – ​​courtesy of BLME and RCI Bank, while the top two-year fix pays 5 percent, again courtesy of BLME.

The BLME deals are available through: Hargreaves Lansdown’s Free Savings Platform.*

Savers signing up to Hargreaves Lansdown’s platform for the first time, Active saving,* can now earn up to £100 as a cash bonus.

The amount of cashback savers will depend on how much they deposit. For example, whoever puts in £10,000 will get £20, while those who put in £80,000 will secure £100.

To take advantage of this, savers must open an account before November 30 and deposit at least £10,000 into one of the savings deals within 60 days.

Those who can afford to put their savings aside for five years or more should consider supplementing their retirement or investing in an Isa stock.

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

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.