Simon Lambert, an economic analyst, warns that inflation is on the rise, meaning that the value of your savings is at risk of decreasing. According to published statistics, the Consumer Price Index (CPI) targeted by the Bank of England has reached 3.1 percent in the 12 months ending in August.
Savings and Interest Rates
If your savings are in an account with an interest rate lower than inflation, you are effectively losing money. For example, if you had £100 in a 2 percent savings account a year ago, with interest, your balance has increased to £102. However, to maintain your purchasing power, this amount should have reached £103.10.
The Importance of ISA Accounts
If you have used your savings in a cash ISA account with a rate of 4.5 percent, your balance has increased to £104.50, and you are effectively becoming wealthier. While the Bank of England has kept rates at 3.75 percent, expectations of future rate increases have driven savings rates up to 5.2 percent.
However, the problem is that banks typically steer their customers towards lower rates, as this benefits them. It is estimated that around £300 billion of deposits are sitting in current and savings accounts with zero interest rates. According to financial experts, if this money were utilized at a rate of 4 percent, it would provide British savers with £12 billion in interest annually.
Therefore, the first step to preserving the value of your savings is to transfer them to an ISA account. In fact, for many of us, it is more important to earn tax-free interest than to seek the best interest rate. You can deposit up to £20,000 per year into an ISA account and benefit from its tax advantages.
However, many of us do not pay attention to optimizing our savings due to daily busyness. But in the current situation, with rising inflation and decreasing value of savings, taking swift and correct action is crucial.
