Inflation has knocked £20bn off our savings since 2010

Inflation knocks £20 billion off cash savings since 2010

Inflation has wiped £80 billion off the value of cash savings over the past five years, according to new research.

Henderson Global Investors, which crunched the numbers, found the returns on savings held in cash have failed to keep up with rising prices by a long way.

Around half of the UK's wealth (£729 billion) is invested in cash savings accounts and more than half that amount (£367 billion) is kept in easy access accounts, which pay the lowest interest rates. The rest is split between the likes of Cash ISAs, fixed term bonds, and notice accounts.

The average return paid on cash savings accounts is currently 0.97% and has stayed close to this level since 2009. But inflation as measured by the Retail Prices Index (RPI) between 2010 and 2014 was 19.8%.

This means that though £36 billion worth of interest was earned by savers on cash deposits over that period (before tax), inflation ate up £116 billion of the value, leaving a net loss of £80 billion in real terms.

If savings were distributed evenly this equates to a £3,000 loss of purchasing power per household in just five years.

Compare savings rates

The cost of cash

Henderson says poor cash returns aren't just the aftermath of the financial crisis but part of a longer term trend.

Since 1990 the cost of living has more than doubled in the UK (122%) but cash in instant access accounts has returned just 69% in compound interest, or interest accumulated on interest.

Henderson says this is a loss of £240 in real terms on £1,000 invested in 1990.

In fact instant access account rates have only exceeded inflation in five of the last 25 years, so savers have had an 80% chance of seeing their cash fall in value in any one year in real terms.

Over the same 25-year period the total return on UK equities was 700%, outstripping all other major asset classes.

Cash still king for many

Despite cash consistently letting savers down, the majority still think cash is king.

In a survey of 2,140 people Henderson found 25% believed cash would be the most likely asset to protect savings from inflation, while 23% said property and only 15% said equities.

Henderson estimates that, after sensibly setting aside around £263 billion in cash for a rainy day, £466 billion of the nation's cash wealth should be working much harder and could be worth £777 billion in ten years' time if put into UK equities.

James de Sausmarez from Henderson said: "You can be near certain you will lose money over the longer term by putting your savings in cash accounts, as the cost of living and expectations for living standards will quickly climb out of reach of the paltry returns on cash deposits.

"Investing surplus cash in investment trusts on a medium to long term basis (at least five years) can offer a good spread of assets that provide a far better way of earning both a higher income and the potential of capital appreciation."

10 things your bank doesn't want you to know
See Gallery
Inflation has knocked £20bn off our savings since 2010
Once you have opened a current account with a bank or other lender, you will get a steady flow of emails, letters (and maybe phone calls) offering you a savings account, loan, mortgage, ISA etc to go with it. But while it may be tempting to have everything in one place, it's better to do the legwork and shop around for the best financial products. You can compare interest rates on loans and savings accounts in the 'best buy' tables in the newspapers, or look online on comparison sites. Remember you can still easily transfer your money between accounts, even if they are not with the same financial institution. 
Whether you want to apply for a new mortgage or refinance an existing one, your bank will probably be very happy to give you an instant quote in the hope that you will go with them. They may not tell you that you can shop around at other lenders. A mortgage broker can give you an overview of the best interest rates on offer, and might be able to cut you an even better deal him/herself. 

Want to cash in your jars of change that are sitting on your shelves at home? Many banks are not very keen on coins. They often only take it from their own customers. You will have to sort it into different denominations and put the coins in the bank's bags in set amounts (for example, £1 for coppers, £5 for silver, etc). Some banks only take a limited number of bags a day, or won't take any at busy times. Others take a different view: HSBC has free coin deposit machines in many larger branches where you pour your jar of coins into the machine and it counts them and automatically credits your account. Barclays, NatWest and RBS also have machines in large branches in city centres.

Bank employees now have a duty to point out that they only advise on the bank's products and don't offer independent financial advice. What they won't tell you is that even the advice they give you about the bank's own products should be treated cautiously. Bank staff are often undertrained, underpaid and overworked. (You could ask for the employee's qualifications before getting advice.) So do your own research and/or find an independent financial adviser.

Nothing is set in stone. Your bank won't tell you this, but sometimes it will waive a fee, for example an overdraft or an ATM fee, depending on the circumstances. You have nothing to lose by asking, if you can argue persuasively why they should waive the fee. Citizens Advice says your bank should treat you sympathetically if you can show financial hardship.

As stated in the previous slide, some things are negotiable – such as interest rates or waiving fees – if you can make a good case for it. In that instance, talking to an employee in person is better than filling in a form online.

If your account is overdrawn and you get paid, your bank could use this money to pay off your overdraft without your permission. However, you have a right to ask them not to do this so you can pay your rent or mortgage first. This is called first right of appropriation. You have to ask your bank in writing, and you'll need to write to them with new instructions every time money gets paid into your account. Make sure you write 'first right of appropriation' in your letter.

If money is mistakenly credited to your account, your bank or building society can recover the money, assuming they do this within a reasonable time. But you may be allowed to keep the money, for example if you didn't realise the bank had made a mistake and spent the money in good faith. You would have to prove that you spent it in such a way that it would be unfair to ask you to pay it back. You can complain to the Financial Ombudsman if you think your lender is being unfair in asking you to repay the money.

If you do have to pay it back, you could try to reach an agreement with your bank to pay it back in instalments without interest being added.

The Financial Ombudsman Service has more advice on what happens when payments have been credited to the wrong account. If you did something wrong - for example, by entering the wrong account number - rather than the bank, the Financial Ombudsman may still uphold your complaint. They consider whether the financial institution made it clear to the consumer that only the bank sort code and account number are used to process the payment, rather than the name of the payee. They will also ask whether the lender should have realised that the consumer had made mistake, and once the problem came to light, did the firm take reasonable steps to try to get the money back from the recipient.

If too much is deducted from your account, your lender may have to refund the full amount of the payment. For example, if the money is taken through a direct debit or credit card payment for a hotel room or car rental. When deciding whether the debit was reasonable, the bank or building society will take into account your previous spending pattern. But the bank doesn't have to refund the payment if you agreed the amount beforehand or were informed of the payment by your lender at least four weeks before.

If you don't have enough money in your account to cover a direct debit payment, your bank may not make the payment. It doesn't have to tell you that the payment hasn't been made, so the onus is on you to keep checking your account. If, on the other hand, the payment goes through, you may be charged for an unauthorised overdraft.


More on AOL Money:

Can you get a better return from secret Cash ISAs?​

How to pay less tax and get away with it​

10 things you didn't know about ISAs​

Individual Savings Accounts or Isas Explained
Read Full Story