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Combating the reducing value of savings

Category: Investments
Author: Tim Leonard
Updated: 14/06/2018

Inflation may be eroding the value of your savings.

The concept of saving is supposed to go like this: you invest your money into an account, the provider of which pays a rate of interest so it grows in value. However, while your savings are apparently stored away in your account, the effects of the rising cost of living (inflation) are actually reducing its value.

The combination of the Government's Funding for Lending Scheme and the economic crisis, not to mention the more recent economic uncertainties, have resulted in historically low interest rates, reducing the ability of savers to earn rewarding returns from traditional bank and building society savings accounts. And, given that inflation is currently on the rise, the effects of inflation could over time quite seriously erode your spending power. All this combined may be having a negative impact on your savings.

To truly grow in value, your savings need to earn a rate of interest, after any tax, which is higher than inflation.

What does this mean?

Suppose you had £10,000 saved in an account paying a rate of 0.92%. After a year, your savings would grow to just £10,092. But after you've added in the effects of inflation, not to mention the fact that if you earn more interest than your Personal Savings Allowance, you will need to pay tax on your non-ISA savings (20% for a basic rate taxpayer, 40% for higher rate and 45% for an additional rate taxpayer), you'd actually be left with far less.

Traditional saving is still a great way of putting aside money each month to build up a nest egg and it is always recommended to have emergency funds available to be used in the event of unexpected expenditure. However, to actually grow the value of your savings, low-paying deposit accounts may no longer be the place to keep it.

If you have a sizeable nest egg sitting in a low interest-paying account, there are alternative options that may deliver returns above inflation – such as Investment Funds.

The risks of losing money with Investment Funds are higher than with traditional savings accounts. However, by obtaining financial advice tailored to your individual circumstances, you can feel comfortable investing your money in a fund or a range of funds suited to your needs. Remember, investments should be considered as medium to long-term arrangements, so they shouldn't be seen as a short-term route to meet your savings goals.

Investment funds can also be placed within a stocks & shares ISA wrapper – meaning both your savings and the returns they generate can be as tax-efficient as possible. Every person over 18 has a £20,000 ISA allowance (in the 2017/18 tax year).

What Next?

What does inflation mean for your savings?

Stocks & Shares ISAs

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.