Poor Savings Returns and High Inflation Erode Value of British Cash Over Five Years

British savers have witnessed their money’s purchasing power decline significantly over the past five years, with inflation and low interest rates combining to erode approximately 11 pence from every pound saved.

Financial analytics firm Moneyfacts revealed that the average savings account has suffered an 11% reduction in real-term value since 2020. The firm advocates for the Bank of England to maintain its base rate at two percentage points above inflation to protect savers’ capital from further deterioration.

The consumer prices index has fluctuated dramatically, reaching a low of 0.9% in 2020 before soaring to 9.1% in 2022. During this period, average savings rates remained disappointingly low, bottoming out at 0.5% in 2021 before climbing to 3.86% last year. The practical impact means that £1 saved in 2020, even when earning average interest rates, is now worth just 89 pence in real terms.

High street banks have faced substantial criticism for their reluctance to pass on higher interest rates to customers. Current easy-access savings rates at major institutions remain notably low, with Barclays offering 1.16%, HSBC at 1.3%, Lloyds at 1.05%, and NatWest at 1.15%.

The situation has prompted discussions about potential reforms to cash ISAs, with Chancellor Rachel Reeves considering measures to encourage savers to explore investment alternatives. The Bank of England’s base rate, which influences both mortgage and savings rates, has experienced significant volatility, rising from 0.1% in December 2021 to 5.25% in August 2023, before settling at its current rate of 4.25%.

Experts suggest that savers should actively seek better returns, with some challenger banks offering more competitive rates. Chase Bank currently provides up to 5% on easy-access accounts for existing current account holders, while GB Bank offers a one-year fixed rate of 4.53%.