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"It's surprising how many savers forget about inflation"

ended 08. August 2023

As interest rates on savings accounts rise, financial advisers are reporting that they are getting more enquiries from clients about putting their money into cash, but that many forget about the impact of inflation. One says that switching into higher interest savings accounts "is like training for a race against Usain Bolt. You’re going to lose anyway, but perhaps you won’t lose by quite as much.” 

Joshua Gerstler, a chartered financial planner at Borehamwood-based The Orchard Practice, says: "We've been getting a lot of enquiries from clients about moving some of their funds into savings accounts in recent months as rates have risen. Although the interest being paid on savings accounts is now higher than it has been for quite a few years, this cannot be looked at in isolation. It needs to be looked at alongside the inflation rate. It's surprising how many savers forget about inflation. Many see a headline rate and overlook that the real return, right now, will often be negative. If inflation is 8% and you lock your money away for one year at 5%, you are guaranteeing yourself a minus 3% return.”

Kundan Bhaduri, director of London-based The Kushman Group, drove home the point: “With inflation soaring and just short of 8% – albeit hopefully on a downward trajectory – savers must exercise caution before placing their hard-earned money into traditional savings accounts, even with enticing interest rates of 5% or 6%. While these rates may appear attractive, they pale in comparison to the eroding power of inflation.”

Scott Gallacher, a chartered financial planner at Leicestershire-based independent financial advisers, Rowley Turton, says he is seeing much the same trend as Gerstler: “I've seen a similar trend of clients asking about putting their money into savings accounts, especially the more cautious ones. The allure of higher savings account rates is attracting their attention, especially when some investments have underperformed recently. While the prospect of 4%, 5%, or 6% interest sounds enticing, it's crucial to consider their financial goals, risk tolerance and investment horizon.”

Paul Denley, CEO at London-based Oakham Wealth Management, quipped that “with inflation running at 7.9% in the UK, moving cash from your deposit account to a higher interest-paying savings account is like training for a race against Usain Bolt. You’re going to lose anyway, but perhaps you won’t lose by quite as much.” 

He added: “If you’re investing for the long term, it may be better to accept a lower starting yield that will grow in real terms, by investing in high quality dividend-paying equities, than opt for a higher starting rate on cash that is projected to fall. In the long run, we know equities outperform bonds, via a combination of yield and capital growth, and bonds outperform cash. It makes sense to maintain exposure to each asset class, albeit at varying allocations, throughout the market cycle. When it comes to market timing, there are two kinds of investors: those who can’t do it, and those who know they can’t do it.”

Meanwhile, Rhys Schofield of Derbyshire-based mortgage advisers, Peak Mortgages and Protection, adds that savers may want to look at an offset mortgage in the current climate: “Being a mortgage broker, I'm biased, but how many of these clients have considered an offset mortgage where a linked savings balance reduces the balance that they get charged interest on? When new fixed mortgage rates may be starting with a 5 or 6, the prospect is very appealing all of a sudden.”

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6 responses from the Newspage community

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Paul Denley
CEO at Oakham Wealth Management
With inflation running at 7.9% in the UK, moving cash from your deposit account to a higher interest-paying savings account is like training in advance of a race against Usain Bolt. You’re going to lose anyway, but perhaps you won’t lose by quite as much. Inflationary pressures are already beginning to ease and interest rates will eventually come down. If you’re investing for the long term, it may be better to accept a lower starting yield that will grow in real terms, by investing in high quality dividend-paying equities, than opt for a higher starting rate on cash that is projected to fall. In the long run, we know equities outperform bonds, via a combination of yield and capital growth, and bonds outperform cash. It makes sense to maintain exposure to each asset class, albeit at varying allocations, throughout the market cycle. When it comes to market timing, there are two kinds of investors: those who can’t do it, and those who know they can’t do it.
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Joshua Gerstler
Chartered Financial Planner at The Orchard Practice
We've been getting a lot of enquiries from clients about moving some of their funds into savings accounts in recent months as rates have risen. Although the interest being paid on savings accounts is now higher than it has been for quite a few years, this cannot be looked at in isolation. It needs to be looked at alongside the inflation rate. It's surprising how many savers forget about inflation. Many see a headline rate and overlook that the real return, right now, will often be negative. If inflation is 8% and you lock your money away for one year at 5%, you are guaranteeing yourself a minus 3% return. Could your investments grow by less than this? In the short-term, yes. However, history shows that if you remain invested in a well-diversified investment portfolio, over the long run your returns will be far superior to those available from a savings account.
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Scott Gallacher
Director at Rowley Turton
I've seen a similar trend of clients asking about putting their money into savings accounts, especially the more cautious ones. The allure of higher savings account rates is attracting their attention, especially when some investments have underperformed recently. While the prospect of 4%, 5%, or 6% interest sounds enticing, it's crucial to consider their financial goals, risk tolerance and investment horizon. I always stress the importance of a well-balanced and diversified approach tailored to their unique circumstances. While some clients express concern about low returns, communication and education help them understand the bigger picture. Ultimately, it's about making informed decisions that align with their financial objectives.
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Kundan Bhaduri
Property Developer and Portfolio Landlord at The Kushman Group
With inflation soaring and just short of 8% – albeit hopefully on a downward trajectory – savers must exercise caution before placing their hard-earned money into traditional savings accounts, even with enticing interest rates of 5% or 6%. While these rates may appear attractive, they pale in comparison to the eroding power of inflation. In real terms, cash in savings accounts loses its value so those seeking to preserve and grow their wealth would do well to explore appreciating assets such as property, equity, ETFs, corporate bonds and other products for diversification. History has shown that these investments tend to outpace inflation and provide robust returns over the long term. Diversified portfolios offer a hedge against the rising cost of living and can better safeguard against wealth erosion. A word of caution though: all investments carry inherent risks, and individual situations differ. Always seek advice from financial advisers when navigating turbulent waters.
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Gary Bush
Financial Adviser at MortgageShop.com
On the flip side, some short-term savings institutions have been seeing outflows from accounts. One thing is for certain: the last 10 months have caused a lot of confusion in the UK financial industry and this is when decent financial advice firms earn their money in helping clients navigate through these choppy waters. Obviously with inflation running at 7.9%, even a high savings rate of 6% isn't going to keep pace but if clients feel more at ease with an actual return than the promise of a return from other instruments in the longer term, then as long as they understand the overall vision, so be it.
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Rhys Schofield
Brand Director at Peak Mortgages and Protection
Being a mortgage broker, I'm biased, but how many of these clients have considered an offset mortgage where a linked savings balance reduces the balance that they get charged interest on? When new fixed mortgage rates may be starting with a 5 or 6, the prospect is very appealing all of a sudden.