How to protect your wealth in a world of rising inflation

person pushing a trolley around a supermarket

Over recent weeks, you will have seen the headlines that inflation in the UK has reached a 30-year high.

The BBC report that the cost of living rose by 5.5% in the year to January 2022. The Office for National Statistics (ONS) said that soaring food and energy bills are to blame, alongside increases in prices of furniture, food, and clothing.

With many analysts suggesting that inflation could rise even further in 2022, anyone with cash savings is currently seeing the real value of their money eroded by inflation. Read on to find out more about the effect high inflation can have on your savings.

Why keeping your money in cash means you could be losing value in real terms

It’s fair to say that savers have endured a difficult few years. Interest rates have been at historic lows for a decade, meaning that interest rates on cash savings accounts have been, in many cases, negligible.

While the Bank of England did raise the base rate in December, interest rates on cash savings remain at record lows. As of 7 February, financial comparison site Moneyfacts showed that the best easy access savings account pays just 0.71% interest – that’s just £71 a year for every £10,000 you save.

If you are prepared to tie your money up for between one and five years then it is possible to benefit from a higher rate, with some providers offering more than 2% on a five-year bond.

However, even these higher rates of interest are nowhere near the current rate of inflation. So, by leaving your money in cash, it will lose value in real terms.

This problem will be exacerbated if you don’t shop around when it comes to your savings. Many popular high street savings accounts, such as NatWest’s Instant Saver and Santander’s Everyday Saver pay an interest rate of just 0.01%. That is a measly £1 in annual interest for every £10,000 you save.

An example of how your cash could be losing value in real terms

Recently, Royal London, the UK’s largest mutual life, pensions, and investment company, compared the growth of the average savings amount of £10,000 over 5, 10 and 15 years.

They revealed that the purchasing power of savings left in a high street savings account will decrease over time as inflation increases.

  • If inflation stood at 4%, the purchasing power over 10 years will fall by more than a quarter (27%).
  • If inflation stood at 5% over 10 years, you would lose over a third (34%) of the “real value” of your money.

Right now, the issue is even worse as the inflation rate stands above 5%.

The chart below shows the value of £10,000 invested in one of the leading easy access savings accounts, compared with the “real” value of the money taking inflation at 2% a year, 4% a year, and 5% a year into account.

Please note: Savings account interest rate taken from Times Money Mentor article with highest interest rate of 0.67% from Shawbrook Bank. This assumes no tax is paid on the interest. This assumes that inflation remains at 2%, 4% or 5% for the whole period.

Source: Royal London

As you can see, while the interest you receive on your money means that the value of your savings will increase, the impact of inflation erodes the real value of your money over time.

Investing your money could help you to inflation-proof your wealth

Rising inflation means that holding large sums in cash can be detrimental to your long-term wealth. It’s an issue that the Financial Conduct Authority (FCA) are tackling, with the UK regulator now having its own targets for reducing the number of people who hold large sums in cash.

The FCA report that there are more than 8 million consumers holding more than £10,000 of investible cash, and they would like to reduce this number by a fifth by 2025.

Investing your money can be one way of ensuring its value keeps pace with inflation.

  • With dividends reinvested, the UK FTSE All-Share index grew 140.37% in the 20 years to January 2021. This would have turned an initial investment of £10,000 into £24,037.
  • Looking further afield, the MSCI World Index – a basket of more than 1,500 shares from developed markets around the world – has generated an average net annual return of 12.7% over the last decade.

Of course, you must remember that past performance is not a guide to future returns. However, in the long term, investing has typically generated superior returns than cash deposits, helping your money to retain its real value – even in the face of a rising cost of living.

A reminder that keeping some funds in cash represents prudent planning

While money held in savings accounts is unlikely to keep pace with inflation, it can be prudent to retain some savings on deposit.

Retaining a rainy day fund – easy access savings containing between three- and six-months’ expenditure – means you will always have access to cash if you need it. It gives you the peace of mind that you have a financial safety net in an emergency.

Additionally, if you are approaching or at retirement, it can often be sensible to retain a sum in cash.

If markets were to fall just as you came to draw money from your pension fund, using your cash savings and delaying this drawdown until markets recover can be a sensible strategy. This can help you to ensure that your pension pot can sustain you throughout your retirement.

Get in touch

If you have any questions about the impact of rising inflation on your wealth, or you’re looking for expert financial planning advice, please get in touch. Email or call us on 01454 416 653.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

What do our clients have to say?