Brits to See £1.5 Billion Plunge in Purchasing Power this Year

The current environment of record low interest rates and rising inflation levels is eating away at the real value of cash savings held by UK consumers.

A recent report from investment managers Blackrock places the total value of long term cash savings held by residents of the UK at £60 billion. The average UK resident holds cash reserves of £8700, with £2270 of that set aside as long-term savings and the remainder for shorter term savings goals and as an emergency buffer.

The central Bank of England interest rates are currently at 0.25%, a record historical low. The interest rates offered by retail banks to savers, while not tied to the central rate, are heavily influenced by it.

The average ‘easy access’ savings account, the most common kind held by savers, allowing them to withdraw their cash when they want it, is currently a mere 0.15%. The best rate available on the market today for an easy access savings account is 1.65%.

Even the kind of savings account that requires a minimum balance and keeps cash locked up for a number of years has a top market offer of 2.55% at present. It’s offered by the Bank of London and accessing it means accepting the cash cannot be touched for at least 7 years, along with a minimum deposit of £25,000 being required.

The average interest rate over the course of 2017 is expected to be 2.4% and economic forecasts suggest this is likely to rise next year due to a rise in the cost of imports into the UK as the pound suffers a drop in value on Brexit uncertainty.

That means the purchasing power of the cash in the average savings account is set to be eroded by around 2.25% this year. If this pattern were to hold over the next ten years British savers would see the value of long term savings lose 22.5%.

Even savers who lock up a minimum of £25,000 for at least 7 years will count themselves lucky if the value of their savings has stayed abreast of inflation by the time they can access them.

The current interest rate on cash savings to inflation ratio has, again according to the Blackrock study, knocked £600 million off the purchasing power to date this year with another £880 million to follow.

Blackrock, as investment managers, clearly have a vested interest in highlighting the cash savings value erosion of the current situation. Their figures come with a call to arms to savers, encouraging them to put long term cash savings into lower risk investment vehicles that should beat inflation. However, that doesn’t make them wrong.

Historically, average interest rates offered on cash savings have comfortably beaten inflation.

That relationship has been inverted since the 2008/09 global financial crisis saw central banks around the world, including the Bank of England, slash interest rates in an attempt to spur economic growth and encourage investment.

Source: swanlowpark.co.uk

Older generations who grew up in an environment of cash savings offering attractive interest rates are likely least aware of the erosive effect the current climate is having on their cash savings.

However, most financial advisors support savers keeping at least some cash savings, even in the present environment.

A cash buffer both acts as a safety net to take care of emergency expenses and also means that investments can be given time to recover in the case of a market downturn hitting their value. That said, Blackrock’s current advice makes sense and savers would be wise to look at minimising cash savings.

Low risk investment alternatives such as bonds and less volatile equity based investments like shares in big, stable companies with a good record of paying dividends, or income funds should be considered for cash savings earmarked for use further into the future.

John Adam

John Adam co-founded iNVEZZ.com, a news, analysis and comparison portal for retail investors. iNVEZZ was acquired by Investoo in 2017.