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Making your savings work harder

The average UK worker has seen their income reduce by almost 10% in real terms (income adjusted to take account of inflation) since the financial downturn began in 2008.

In the public sector many employees have seen their pension contributions increase, while their pay remains the same year on year. Personal finances look set to remain tight - with many teachers and NHS staff seeing their pay-rises limited to 1% for 4 years, from 2016-17 onwards.

At the same time in the private sector, many legal firms have imposed pay freezes for trainees - leading The Law Society to call for the reintroduction of a mandatory minimum salary for trainee lawyers.

Because incomes have become increasingly stretched, like many people you may find it hard to save as much as you would like. In addition low interest rates mean cash savings rates are low. So it's important that the money you do put aside works as hard as possible, to help you meet your savings goals.

Avoid paying unnecessary tax on your interest

Where you keep your savings will affect the amount of tax you pay on the interest they earn.

Savvy savers can avoid paying unnecessary tax on their interest by taking advantage of their annual ISA allowance (£15,240 in the 2016/17 tax year).

Saving £5,000 per year into a cash ISA, between 2010 and 2015, means you could have received significantly more interest, than if you had saved the same amount into an ordinary savings account over the same period*:


How inflation can erode the value of your cash savings

Keeping money in cash savings (rather than other asset types such as stocks and shares) is often considered as low risk. But low risk, doesn't mean no risk.

Simply put, inflation is a measure of how much you can buy with your money, or what it is 'worth' in real terms (£1 today, for example, buys you much less than it would have 100 years ago).

Inflation rates (as measured by the Consumer Price Index - CPI) are currently very low 0.2% (Dec 2015), and the Bank of England is predicting average annual inflation to rise to 1.2% by Q4 2016, with a longer term target of 2% (Source: BoE Inflation Report Nov 2015).

For the purposes of this illustration, let's assume that the rate of inflation is 2% (based on the Bank of England long term target). If you put £10,000 into a bank account with 0% interest, in real terms it would be worth:


So, unless you put your cash into a savings account or investment where the return outperforms inflation, its value could decrease in real terms.

If you're ready to discover more about how to make your savings work harder, download: 'Selecting the right savings account: 3 essential considerations'.

Selecting the right savings account - download the pdf now

*Interest earned on £30,000 between 2010 and 2015 calculated using Bank of England average annual interest rates for a 1 year fixed rate bond.

Assuming £5,000 lump sum is invested at the start of every tax year. Interest calculated daily and compounded over the full time period.

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