Savers lose £113 billion in real terms even as inflation rate begins to fall

• The nation has lost £113 billion over the past year in real terms on the £1.81 trillion held in savings
• £1,000 in an easy-access account is now worth £938 in real terms
• Even if a saver had got Base Rate on their savings, their £1,000 would be worth £958 in real terms
• £250 billion is earning no interest, meaning it has lost £18 billion after inflation

Laura Suter, head of personal finance at AJ Bell, comments:

“Even though inflation has fallen today, savers are still being pummelled by high inflation and lower returns on savings. Although interest rates have risen considerably over the past year and a half, savers still lost money in real terms thanks to double-digit inflation for much of that period. Over the past year the average saver with £1,000 in an easy-access account will find it’s now worth £938 in real terms, having got an average of 1.18% interest over that period. The top rate easy-access accounts would have paid more over that time, but nowhere near current inflation of 7.9%.

“Based on the £1.81 trillion that Brits have in savings accounts, it means the nation’s savings could have collectively lost as much as £113 billion over the past year in real terms, based on current inflation and assuming savings were earning the average easy-access rate. Although some of that money will have been in fixed-rate accounts earning higher interest, a large proportion will also have been in accounts earning zero or minimal interest. We know that £250bn of savers’ money is sitting in accounts earning no interest, with that money alone losing £18 billion in real terms.

“High-street banks are being pressed to pass on more interest rate rises to customers, to narrow the gulf between Base Rate and the interest rates being offered by banks. But even if a saver had benefitted from full Base Rate on their savings over the past year, their £1,000 savings would now only be worth £958 in real terms today.

“This paradox of persistently high inflation and lower savings rates means the incentive for savers to stash away cash just isn’t there. While savings rates are at decades-long highs, inflation is still eating far more into savings. Part of the Bank of England’s plan to reduce inflation relies on people deciding that savings rates are juicy enough to entice them to save more money, rather than spend it. But with cash still losing a large chunk of its value in real terms, that incentive isn’t very compelling. In fact, if you’re sat on a healthy pot of cash and have a decent safety net behind you, the financial incentive when prices are growing quicker than your savings is actually to spend your money, instead of watching your buying power dwindle.

“The latest Bank of England figures highlight that, with savers withdrawing a record sum of money from cash accounts in May – to pay bills, overpay on mortgages and spend – the exact opposite of what the Bank and government wants them to do.

“Those who opted for a fixed-rate account a year ago will have fared slightly better, as rates are on average higher than the easy-access market. However, the top one-year fixed rate bond in June 2022 paid 2.6%, according to Moneyfacts. That means a saver who put away £1,000 would be sitting on a real terms loss of £49 today. The fixed-rate market has soared since then, meaning the current top one-year deal will pay 6.15%, according to Moneyfacts. That’s still not matching current inflation of 7.9%, although it could end up offering an inflation-beating return over the next 12 months as prices cool, finally reversing the paradox of shrinking savings.

“Clearly the more money you have, the bigger the real terms losses. Someone with £50,000 saved in the average easy-access account over the past year would now have £46,885 today in real terms, a loss of more than £3,000.”

Shop around for savings rates and consider investing

“Regardless of the real-terms losses, savers should still try to maximise their return on cash where possible. While Bank of England data shows the average easy-access account is currently paying 1.83%, you can actually get up to 4.55% on the top-paying instant access account. On top of that you can get even higher rates on fixed-rate accounts, with a one-year account paying up to 6.15% – which is why more people are shifting their money to fixed-rate deals. However, anyone who thinks the Bank is going to hike rates again might want to wait on the sidelines to see if rates in the fixed rate market increase further.

“Over the past year the stock market will have got you closer to inflation, but still won’t quite have beaten it. The FTSE 100 delivered a total return of 7.5% over the past 12 months, while the S&P 500 handed investors a similar return of 7.3%*. These figures highlight the long-term trend of investments delivering more than cash historically, with Credit Suisse data on long-run global market returns showing that since 1900 equities have outperformed bonds and cash in every single one of the 21 countries they have long-run data for. Over that 123-year period developed market stocks have delivered an annualised return of 5.1% above inflation, while emerging markets have achieved 3.8% over inflation, which should provide some comfort. So, if you’re squirrelling money away for five to 10 years or more, the stock market is statistically a better bet. However, people will always have a need for cash, for their emergency pot or short-term spending.”

*Source: FE

Table: £1,000 in 2022 vs. today

Source: AJ Bell. Factors in 7.9% inflation. Easy access based on interest paid monthly at the average easy access rate in each of the last 12 months, according to the Bank of England. 1 yr fixed rate based on interest paid annually and the best fixed-rate available, according to Moneyfacts.