Inflation has knocked £20bn off our savings since 2010

Rising prices have cut purchasing power of savers' cash

Updated: 
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.

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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."

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