Inflation has caused £37bn of damage to money in savings accounts – but we’re still reluctant to let go of cash

Savers will have lost twice as much in interest as they earned due to inflation in 2023, according to a report.

As interest rates rose with the Bank of England’s successive rate hikes, savings rates rose too – and Brits have now earned £32 billion in interest between January and the end of September.

However, according to a new study by Janus Henderson Investment Trusts, inflation has reduced the value of savings pots by £69 billion over the same period.

The inflation rate in October stubbornly remained at 6.7 percent, the same as the previous month.

Inflation has robbed savers of £37 billion in interest earned on cash savings

Almost a quarter of savers keep money in cash deposits or physical cash to protect it from inflation.

But if they do, savers may not be able to get the most out of their nest eggs, says Janus Henderson Investment Trusts.

With interest rates at their highest since 2007, those who have managed to save in some of the best savings accounts for over a decade are in a better position than they have been in recent years.

Between January and the end of September, savers earned £32 billion in interest on easy access and fixed-term accounts, cash Isas, NS&I and current accounts.

Janus Henderson expects they will earn a record £45bn in interest in all of 2023 – three times more than in 2022 and more than they earned in the six years from 2017 to 2022 combined.

The average interest rate for an easy-access account is 3.19 percent, according to interest rate checker Moneyfacts, and money savers can find easy-access accounts with up to 5.25% interest.

While the average one-year fixed interest rate for bonds is 5.36 percent. The best one-year fixed bond pays an interest rate of 6.11 percent, although fixed-rate accounts with interest rates above 6 percent are gradually disappearing.

James Blower, founder of the website Savings Guru, says: “We cannot imagine how accounts with more than 6 percent can continue to stay at the top beyond a week.”

Despite these high interest rates, savers still suffer from inflation. Not a single savings account exceeds the inflation rate, which is 6.7 percent.

What could help protect Britain’s nest egg?

Janus Henderson claims that those who invested in global stocks achieved returns six times higher than cash between January and September this year, significantly outpacing inflation.

Adrian Lowery of investment platform Bestinvest says: “Whether or not global equity returns were “six times” higher in the first three quarters of this year, it is certainly the case that MSCI World total returns have been higher than savings rates.” , at more than 9 percent.

“There is no guarantee that these returns will continue at this pace in the near term, but it is also entirely possible that savings rates have plateaued and could fall – and historical evidence suggests that global equities will in the long term offer the best opportunities so that savers and investors can achieve returns that exceed inflation.”

Bestinvest’s Jason Hollands adds: “Stocks have a very strong track record of beating inflation over the longer term, but that doesn’t mean they provide a short-term hedge against inflation.”

A look back at history shows that investments outperform cash returns over the long term.

As we move toward a more uncertain market environment, it makes sense for cautious investors – or someone nearing retirement – ​​to limit the risk they take on by maintaining an adequate liquidity buffer within a well-diversified portfolio.

For those who can afford to tie up their money in investments for at least five years and are happy to tolerate the inevitable volatility in the stock market, it is wise to keep the money invested.

Myron Jobson, senior personal finance analyst and interactive investor, says: “There is no binary answer to the saving or investing debate.” The answer is: you should do both if you have the means to do so – regardless of your goals and mindset to risk.

“It’s not helpful to look at savings rates and investment returns in the same way because it creates the expectation of a steady annual return, when the reality is that you could have a double-digit return one year and a loss the next.”

Tech companies in particular have bounced back to life after a sluggish 2022, buoyed by a wave of interest in artificial intelligence – Nvidia, Meta and Tesla are up 187 percent, 132 percent and 95 percent, respectively.

Lowery says: “The global index’s performance was driven in large part by the outperformance of the so-called Magnificent Seven US tech stocks, which make up a staggering 18 percent of the MSCI World Index.”

“This increase, in turn, was driven largely by positive news about the business opportunities of advances in improved artificial intelligence.”

“In fact, Bloomberg data suggests that the MSCI World would have fallen without the contribution of the Magnificent Seven.”

Inflation has eroded the benefits of savings interest, according to a new report from Janus Henderson Investment Trusts

Today’s winners could be tomorrow’s losers, so diversification is key when investing – especially in times of geopolitical tensions and high inflation.

Jobson says: “Think globally, think of well-diversified mutual funds and mutual funds as a starting point. These help spread investment risk across sectors, markets and countries.”

Those looking to protect themselves from potential AI and tech mini-bubble deflation might consider adding another level of diversification, with an ETF that is equal weighted rather than market cap weighted, or an ETF that tracks value stocks.

But don’t write off carefully chosen, actively managed funds to balance a portfolio.

There are arguments for saving some money in the short term.

“Saving cash is the way to go to achieve short-term savings goals – typically those less than five years away.” “It’s also important to maintain a healthy fund for rainy times – a salary of three to six months’ salary is one good rule of thumb,” Jobson continues.

While Lowery says, “As a place to store cash that might be needed in an emergency or in a year or two, deposit accounts are more attractive than they have been in years.”

But he warns: “It is entirely possible that savings rates have plateaued and could be falling – and historical evidence suggests that over the long term, global equities represent the best chance for savers and investors to achieve returns that beat inflation .”