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Cash savings ‘real return’





In today’s world we can be bombarded with internet feeds, news and information every day. Sometimes to see the overall picture more clearly it can pay to take a step back and take the long view.

Taking the long view is particularly appropriate when considering investing and planning for your financial future.

We all know inflation erodes the spending power of our money but perhaps find it more difficult to judge the effects over time. In recent times, most savers are probably happy, or relieved, to have higher interest rates available after years of historic low rates, albeit tempered for those with mortgages reaching the end of a fixed rate. However the rise in savings rates has to be considered against the effects of inflation and the trend in reducing consumer spending power is long term.

The Bank of England offers an online calculator, which allows you to compare how prices in the UK have changed over time. Here are a few examples:

So how much would a deposit account have to pay to beat inflation and provide a ‘real return’ – for most taxpayers that depends on the income tax position and whether their income reduces the personal savings allowance of £1,000pa, to £500 or nil. The reality is that the interest gained is unlikely over time to keep pace with inflation.

In the UK we hold a significant amount of our household savings in cash deposits. A review by the Financial Conduct Authority (FCA) in July 2023 found that UK consumers collectively hold around £1.5 Trillion in savings accounts. The review examined the operation of the cash savings market after previous action by the regulator in 2016, when it determined the market was not working effectively for consumers.

The report this year stated that the regulator had raised privately and publicly with the industry the importance of treating savers fairly as the UK bank base rate had risen sharply from 0.1% in December 2021 to 5% in July 2023, it concluded that competition had delivered better rates but that many long-standing easy access customers are penalised. The FCA also estimated that only 55% of consumers shopped around for a better savings rate.

Cash savings will no doubt remain a part of most consumer’s financial arrangements and an important provision for immediate or short-term needs. The question is how often, if at all, we consider whether the interest rates being paid are competitive and whether we are holding cash deposits above those required for short-term needs. Alternative tax efficient investments towards longer term goals and retirement planning come with an investment risk and some volatility but need to be considered against the power of inflation to drive down the spending power of cash savings over time. If you want a further illustration of inflation try the Bank of England inflation calculator website below.

Aside from the state pension and other benefits provided by the state, which are subject to change, we are each responsible for our own affairs and planning. Whether you chose to speak to a financial adviser or not, which we of course recommend, you alone can decide to check your cash savings rates and act on your future planning.

If you would like to speak to one of Wilsons’ financial advisers to explore your options for your financial future, just email [email protected] or call 0115 942 0111.

Article drafted by Ian Baguley


FCA Cash Savings Market Review July 2023