How Savers Missed Out on Nearly £4 Billion Due to Inflation – How to Avoid This

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( — November 9, 2017) — By anyone’s standards, £4 billion represents a huge sum of money. For the average UK saver, however, this is an extraordinary and life-changing amount that is worthy of instant recognition. 

So, even accounting for the current economic climate, it is staggering to note that British savers missed out on a cumulative £3.8 billion as a result of plunging interest rates and rising inflation. 

With inflation touching 3% and the average cash ISA holder losing £445 during 2017 in line with a stagnant interest rate, standard investment vehicles are no longer delivering the desired returns. 

How exactly did this happen, however, and are there steps that you can take to avoid the same happening to you?

The how and the why

The inflation rate hovered around the 2.7% rate during the second financial quarter, before peaking at 2.9% in the summer. This has sent the cost of living soaring, with fundamental items such as food and fuel being hit especially hard. At the same time, real wage growth has stagnated in the UK, minimizing disposable income levels and the amount that households can commit to savings. 

Then we have the base interest rate which has remained rooted at 0.25% throughout 2017 and forced lenders to restrict the returns available through standard savings vehicles. Banks have also adopted relatively low interest rates in line with a precarious economic climate, making cash ISAs increasingly less lucrative and appealing to savers. 

So, even though the Bank of England (BoE) increased the base interest rate to 0.5% at their recent November policy meeting, this may have come too late to reverse the losses experienced by cash ISA holders. 

How to avoid this in the future 

In many cases, this type of climate encourages households to either increase their spending or hoard cash. Neither of these are effective solutions, however, so it is far more beneficial to instead seek out alternative savings vehicles that can sustain higher returns.

One particularly viable option is to transfer your funds into a stocks and shares ISA, which instantly diversifies the deployment of your savings and offers you access to higher potential investment returns. While it can be argued that this marginally increases your risk, you can increase your chances of successful investing by using expert service providers such as Bestinvest and tapping into a vast resource of professional investment research. 

Firms of this type will also facilitate a quick and seamless transfer of funds, while minimizing fees and enabling you to retain access to any associated tax-breaks. This is important, as it helps you to retain as much of your capital as possible while optimising future returns.  

The last word 

Once again, transferring your funds now may not be enough to offset the losses that your cash ISA has incurred this year. With the economic climate unlikely to improve significantly in the near-term and further interest rate hikes unlikely for now, however, this may provide a much-needed boost to your savings in 2018.