British savers £3,000 worse off since 2010
British households have seen their cash savings plummet by £3,000 over the past five years thanks to inflation.
Henderson Global Investors, which did the number crunching, found that since 2010 money languishing in cash accounts fell by a collective £80 billion - or £3,000 per household, due to the rise sin the cost of living.
In the four-year period between 2010 and 2014 alone, inflation (as measured by the retail prices index) was 19.8%. This means the £36 billion earnt in interest by cash savers during that time was easily dwarfed by the £116 billion eaten away by inflation.
Henderson added that there were wide variations in the amount of money people who have saved have put away and some savers have experienced "very severe" losses.
Cost of living doubled
Since 1990, the cost of living has more than doubled in the UK (122%), while deposits in instant-access accounts have earned only 69% in compound interest. Henderson explained that this is a loss of £240 in real terms on £1,000 invested in 1990.
It added that in only five of the last 25 years have instant-access account interest rates exceeded inflation, meaning savers had an 80% chance of seeing their cash fall in value in any one year in real terms.
Over the same 25-year period, the investment manager said the total return on UK equities was 700% and on global equities it was 470%. Meanwhile, house price grew by 289% and wages by 163%, according to official stats.
Moreover, the group found that a third of people have no savings at all.
James de Sausmarez, head of investment trusts at Henderson, said: "Human beings are hard-wired to avoid loss. It's a cognitive bias that is hard to overcome when we consider our savings. This flaw in our thinking compels us to cling to the nominal cash value of our savings, so in recoiling from taking investment risks, we unwittingly suffer the corrosive effect of inflation.
"Our research shows you can be near certain you will lose money over the longer term by putting your savings in cash accounts, as the cost of living, and expectations for living standards will quickly climb out of reach of the paltry returns on cash deposits. It's costing us billions of pounds every year."
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.