Five years of low interest rates have 'ravaged' savings

Pound coins

It has been five years since interest rates were cut and cash savings have been ravaged, says Alex Hoctor-Duncan, head of European Retail at BlackRock.

It was half a decade ago that worldwide central banks agreed to co-ordinate an interest cut, that would eventually lead to the Bank of England cutting its base rate to a record low of 0.5% in March 2009.

Hoctor-Duncan says many savers keep their money in cash as a "safety blanket" because of ongoing market uncertainty, but the combination of high inflation and low interest rates is having a "corrosive impact".

Figures from BlackRock show that savings of £1,000 five years ago today have a real value of just £846.

Savings of £5,000 have been eroded to £4,232, while a nest egg of £200,000 five years ago has seen more than £30,000 wiped off its value.

"Investors looking to grow their wealth in the long term need to look beyond cash and reassess their attitudes towards risk," says Duncan.

Peter Chadborn, director of adviser firm Plan Money, points out that many people are not comfortable with equity investing, however. "Equities are often associated with carrying risk, but so is keeping money in the bank, as that money is being eroded by inflation."

Find the best cash Isa or savings account for you

Chadborn says individuals concerned about the impact of inflation on their finances and unable to find a savings rate that can beat it should consider investing in equities through a stocks and shares Isa. Drip-feeding money into an investment, rather than putting in a lump sum, can also help to reduce risk.

"It is important to make yourself very educated when you are investing. Understand the importance of diversification, and the risk profile and objectives of any investment you are considering rather than just looking at the performance," he adds.

This article was written for our sister website Money Observer