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Written by Wesleyan

Inflation confusion means millions of savers miss out

investments
3 min read
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Almost 50% of people risk seeing their hard-earned savings lose value over time because they don’t understand how inflation affects their money according to new research.

The data, from Wesleyan, found that almost half (47%) of UK adults aren’t sure what inflation is, while nearly three in five (57%) aren’t aware of how it will affect their cash.

  • You can see the key findings of Wesleyan's research in this infographic PDF (73KB).

What is inflation?

Inflation is a measure of the rise or fall in the cost of goods or services. If goods or services increase in price, the same sum of money will buy less over time, eating into people’s spending power. To combat this, savers need to make sure their funds are growing at the same rate as – or faster than – inflation.

The Bank of England base rate is currently 0.1% whereas inflation currently stands at 3.1% and is forecasted by the Office for Budget Responsibility (OBR) to increase to 4% in 2022. This means that money left in basic savings accounts that track the base rate are most likely to be losing buying power over the long-term.

The research findings

Wesleyan’s research found that standard savings accounts, where interest rates are often much lower than inflation, are Brits’ most popular saving option (49.5%).

However, a third (33%) of savers were unaware of the current rate of interest they were receiving on their bank accounts, making it impossible for them to assess how they were performing in line with inflation.

Only one in eight (13%) adults had invested their savings in stocks and shares, where their money could have a stronger chance of securing real-term growth.

Nearly two fifths (38%) of savers were unaware that investing could help protect their savings from the effects of rising inflation.

Martin Lawrence, director of investments at Wesleyan Group, said: “Inflation is very much a hot topic at the moment and many of us know it will impact the pounds in our pocket as the cost of living rises. What fewer people realise is the longer-term impact inflation can have on their savings.

“Keeping cash in savings accounts during a period of rising inflation and low interest rates, such as we have now, means your money is in effect losing value. If you can lock your money away for a minimum of five years, then it’s worth thinking about investing in stocks or investment funds, which give savers a fighting chance of beating inflation.

“For those who want to invest in stock markets but don’t have the expertise, investing in a ‘multi-asset’ fund could be a good starting point. A Wesleyan With Profits ISA, for example, enables people to invest in our With Profits Fund rather than having to invest in individual companies or assets, and the financial returns are also ‘smoothed’ to reduce the impact of any market volatility on your money.

"A fund is managed by a dedicated, professional Fund Manager whose job is to achieve the strongest possible financial returns for all its investors. Importantly, for anyone investing in a fund via an ISA, there’s no requirement to pay capital gains tax or income tax on your investment returns.” 

“Please remember the value of investments, and any income can go down as well as up and you may get back less than you invest.”

Example of inflation impacting savings:

£100 kept in the highest-interest easy access account on the market, which currently pays 0.65% interest, would only be worth £72.16 in 10 years’ time in real-terms, if inflation reaches 4% and stays there.

Wesleyan’s research is based on a survey of 2,000 UK adults, conducted by 3Gem between 1st – 6th October 2021.

Please note that past performance is not a reliable guide to future performance and the value of your investment, and any income can go down as well as up, so you could get back less than you invested.