A typical saver loses 9% in real terms, so how to protect your savings from inflation

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The real savings return plummeted to its lowest level since February 1976, and inflation devoured nearly 9% of last month’s typically rainy day funds.

A study by Scottish Friendly and think tank Center for Economics and Business Research (Cebr) found the real annual savings rate fell to -9% in July.

A slight rise in the average savings rate moderated the annual declines in August and September, but still resulted in substantial declines of -8.8% and -8.9% respectively.

Silent killer: interest rates on savings accounts may appear to increase the value of the account, but inflation can “virtually” erode the value of your savings.

Consumer price index inflation rose again to 10.1% in the 12 months to September, up slightly from a record 9.9% in August.

This means that consumer prices are more than five times higher than the Bank of England’s long-term target of 2%.

Meanwhile, the average easily accessible savings rate was just 0.85% in early September, according to Moneyfacts data.

A study by Scottish Friendly and CEBR found that the average UK household saved just £17 a week between July and September.

This represents a year-on-year decline of 74% as the average household is believed to have saved £66 a week during the same period last year.

To offset the impact of inflation, households would need to earn £59 extra a week before tax or spend £49 less a week to be able to save at the same level as last year.

Estimated weekly savings for the average UK household from 2018 to present.

To what extent has inflation eroded savings?

Inflation has risen 795% between 1976 and today, according to This is Money’s historical inflation calculator, which uses the longer-run retail price index rather than the consumer price index.

A calculator shows that a person who had £100 in 1976 would need £894 today to have the same purchasing power.

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

A deposit of £100 in 1976 turned out to be worth £1,067 in today’s nominal terms. This equates to nearly 970% growth.

But when inflation is taken into account, the real rate of return on savings from 1976 to the present drops to just 67.3%. This equates to a total of just £167.30.

This meant that the average saver with easy access, compounded monthly interest, during that time benefited from a real term rate of about 0.35% after accounting for inflation.

Easy Access Revenue: This chart shows real annual revenue for instant access accounts from 1966 to 2022.

Over the past year or more, interest rates paid on savings have remained below the CPI, meaning savers are actually losing money in ‘real’ terms.

There is currently no savings product on the market that can roughly match the 10.1% inflation rate.

Savings rates have risen significantly in recent months, but the best savings deals are still woefully inadequate. The best easy access rate is 2.81% and the best fixed rate is 5.1%.

“The combined effect of rising inflation, stagnant wage growth and low interest rates means savers have had a very tough time over the past year,” said Scottish Friendly savings specialist Kevin Brown. To do.

“These conditions created a perfect storm for savers, resulting in real returns dropping to their lowest level in 46 years.”

Real returns remain low, but savings levels are expected to gradually improve following the announcement of the Energy Price Guarantee, despite the current reduction in government billing caps.

The Energy Price Guarantee stopped the Ofgem Energy Price Cap from rising to £3,549 for the average household on October 1st, and capped the increase to £2,500 for the average household.

It was originally run for the next two years, but was shortened to next April by new Prime Minister Jeremy Hunt.

Before the policy was first announced, the amount households could save as a percentage of disposable income was projected to drop sharply to a low of 1.9% over the next 12 months.

However, Scottish Friendly and CEBR now forecast that this ratio will rise to 6.9% in 2023. This is because it is expected that a portion of household utility bills will be saved until at least April next year.

CPI inflation is currently at 10.1%. This means that consumer prices have risen more than five times his 2% long-term target for the Bank of England.

Mr Brown added: “The situation remains dire, but the outlook has brightened a bit after the government took steps to address rising energy prices.

“As interest rates continue to rise, households should be encouraged to save, but while inflation remains high, it is important to consider how best to protect one’s money from the eroding effects of inflation.

“Keeping cash is important for emergencies and rising electricity bills, but in the current situation, we have to spend more money to meet the rising cost of living.

In addition, savings providers may be slow to pass on interest rate increases to their customers. With that in mind, the best way to make your savings more effective in the long run may be to capitalize on your investment’s growth potential.

How can savers combat the effects of inflation?

Anyone who can deposit money for five years or more should consider investing to maximize their returns and outpace inflation.

However, investing in shorter timeframes is generally not recommended due to the higher risk of losing money. So those who think they need cash quickly may have little choice but to stick to a savings account.

In the face of inflation, savers can easily give up caring how much interest their banks and building societies are paying.

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

Investments: Those who can save or invest for the long term may be better off looking to the stock market to try to beat inflation

For those who want unlimited access to their money to cover rising bills such as energy, mortgages, travel and food, the best Easy Access deals currently pay almost 3%.

Al Rayan Bank pays 2.81%*, Yorkshire Building Society pays 2.5%* and Paragon* and Shawbrook Bank* both pay 2.3%.

Those who already have enough emergency funds in place should consider putting their extra cash into fixed-rate deals.

Fixed rate savings offer the best returns. Best 1 year repair pays 4.6% – Best 2 year repair pays 5%, courtesy of BLME and RCI Bank (also courtesy of his BLME).

BLME deals are available through Hargreaves Lansdown’s free savings platform. *

Savers who sign up for the first time on Hargreaves Lansdown’s platform, Active Savings*, can now earn up to £100 in cash bonuses.

The amount you receive with Cashback Saver depends on the amount you put in. For example, someone who invests £10,000 secures £20, and someone who invests £80,000 secures £100.

To benefit, savers must open an account by November 30th and deposit at least £10,000 in any savings transaction within 60 days.

Those who can afford to stash their savings for five years or more should consider topping up their pension or investing in stocks and shares.

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

We’ve highlighted the key players in the table below, but we encourage you to do your own research when considering the points in our full guide.

>> This is Money’s complete guide to the best investment platforms and Isas.