For some years, the Bank of England’s target for annual Consumer Prices Index (CPI) growth has been an average of 2%. In 2021, however, inflation indices have risen faster as the economy bounces back. This poses a problem for savers, who risk seeing the real value of their savings dwindle.
Invisible danger
Inflation can have a significant impact on savers and investors. While a modest level of price inflation is generally seen as acceptable and even as a sign of a healthy economy, a high inflation rate erodes the spending power of money. For those with a lot of cash in the bank, interest rates lower than the inflation rate mean they will see their cash eaten away by an invisible but corrosive force.
Bank interest rates have been very low since the global financial crisis; the inflation rate indicated by CPI growth has also been subdued. This year, however, the recovering economy and some global factors have caused inflation to rise significantly – and many economists think above-target inflation may prove persistent.
Is cash really king?
It is therefore surprising that a survey of 2,000+ participants by NatWest Group found that four in five of the 76% of parents or guardians who save or invest for their children are doing so exclusively in cash. Whilst praising those that put money aside for their children, NatWest also questioned the effectiveness of their decision-making, ‘The purchasing power of these ‘safe’ cash balances actually goes backwards over the longer term.’
Of course, a healthy bank balance has its place, acting as a reassuring buffer against unexpected expenditure (appropriate insurance policies reduce the risk of this). But cash is rarely the best long-term strategy for larger sums.
It is important to take professional advice before making any decision relating to your personal finances. Information within this page is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK.
Equity release will reduce the value of your estate and can affect your eligibility for means tested benefits.
Tax, Estate and Inheritance Tax planning are not regulated by the Financial Conduct Authority
The value of pensions and investments can fall as well as rise. You may get back less than you invested.
CA Financial Services Ltd are an Independent Financial Adviser based in Sevenoaks, Kent. From our Sevenoaks offices, we offer IFA services throughout Tonbridge, Tunbridge Wells, Dartford, Orpington and across into Sussex and Surrey. Please call us on 01732 617 950 to book a free initial appointment.
CA Financial Services offer financial advice, pensions, investments, ISAs, Equity Release and Inheritance Tax Planning for the whole family. We have 14 years’ experience as Financial Advisers based from Sevenoaks and are truly independent, allowing us to give our customers the best financial advice possible.
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