Many know that if you’re looking for a low-risk option to hold your money, then savings ISAs are usually a safe bet. However, with recent inflation rising at a much higher pace than savings rates, the money you place in a cash ISA could be losing value in real terms.
Based on a previous survey conducted by Finder, the average adult in the UK has approximately £17,773 in savings. If savings rates had risen in line with inflation over the last 10 years, then this amount placed in a cash ISA in May 2013 would now be worth £23,333.
However, due to the abnormally high inflation we’ve seen in recent years, this figure is actually more than £4,000 lower, with the real value sitting at just £19,286.
With inflation sky-rocketing over the last few years in particular, the study found that £17,773 placed in a cash ISA as recently as January 2021, would still have lost around £2,640 in “real-term” value by May 2023. If savings had increased in line with inflation, this amount would have grown to £20,767, yet the actual figure stands at just £18,127.
Savings rates can’t keep up with inflation
Over the last decade, the average savings rate has fallen below the inflation rate every year, with the only exception being the 21 months between November 2014 – August 2016. This problem has worsened even further over the last few years, as a variety of economic and geopolitical events pushed the UK’s inflation to record-breaking highs.
The biggest gap between inflation and savings rates over the last 10 years was recorded in July 2022, when inflation reached 10.1% whilst savings rates fell to just 0.68%. This caused an enormous chasm whereby inflation was 9.42% higher than savings rates.
Although average savings rates are rising again and inflation is beginning to come down slightly, as of May 2023, the gap between the two is still a significant 6.27%. This means that any money sitting in an average UK savings account will be losing value in “real terms”, as the purchasing power of the money decreases with inflation and the increasing cost of living.
Kate Anderson, banking expert at finder.com said, “Although we are beginning to see inflation start to come down, prices are still rising and at a far greater pace than savings rates.
“The back to back increases to the base rate has led to more competitive savings products being added to the market, but these are still unable to compete with inflation, as we can see by the huge gap demonstrated in the chart.
“Given the abnormally high inflation we’ve seen over the past few years, it’s important now more than ever to ensure that you shop around for the best rates on your savings account.
“Don’t be afraid to vote with your feet and switch to a better deal if the rates at your current bank aren’t competitive enough. One of the best ways to try and combat the effect of high inflation is to ensure that your money is earning as much interest as possible.”