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Inflation and your savings

Getting under the bonnet of inflation and how to reduce its impact on your savings.

The UK’s inflation rate is now at 2.9%, which is its highest since 2013. Combined with the fact that savings rates remain at low levels, it’s now even harder to secure a good return. So what does inflation really mean for your savings and how can you minimise its impact?

What is inflation?

Inflation is when money loses value over time. It is happening constantly and is generally why things are more expensive now than they were 10 or 15 years ago. When the inflation rate is high, it means you can buy less for the same amount of money.

How does inflation impact your savings?

High inflation is not good news for savers, as it generally means that interest rates on savings accounts are low. If inflation is higher than your savings rate your money is actually shrinking as prices are increasing faster than your savings are growing. If your goal is to make money then you need to find a savings account or investment that beats inflation.

What can you do to inflation-proof your savings?

There is no way to completely protect your savings from the effect of inflation but there are steps you can take to minimise the impact. Generally cash savings accounts are the worst place to leave your savings long term. However, if you are saving for the short term or if you need to get access to your money quickly then cash accounts are usually safer.

If you have a longer-term savings goal in mind (5 years or more) it might be time to consider investing at least part of your savings.

Don’t forget the impact of tax

You also need to consider how much of the interest you will receive on your savings before you are taxed. From April 2016, a basic-rate tax payer can earn up to £1,000 in interest tax free each year. If you earn over this you will need to pay tax which will reduce the value of your savings even further. Don’t forget that you have an annual ISA allowance each year (£20,000 for 2017/2018) – this is the amount you can save in an ISA tax free. ISAs can be either cash or stocks & shares linked and using this allowance to the full could help towards your fight against inflation.

Can investing help protect against inflation?
If you have longer-term savings goals and you are willing to accept some level of risk you could consider investing some or all of your savings. History shows that investments can deliver better returns than cash accounts if they are left to grow over the longer term. Please note, past performance should not be seen as a guide to future performance.

There are many different types of investments available including stocks and shares. Contrary to what many believe, you don’t need a large lump sum to start investing and it’s not as complicated as you may think. However, investments carry additional risks and can fall as well as rise, so you could get back less that you invest. The general rule is the greater the potential return the greater the potential loss.

Finally, don’t forget to review regularly

Keeping your savings in a top-paying account is a step towards beating inflation. If you have older savings accounts (especially those that had introductory offers) your money may not be working as hard as it could for you. Conduct a review of your savings accounts and take action on any that are paying a low rate.

Police Mutual offer a range of savings and investments products. Whether you want to save regularly or invest a larger amount, our products could help meet your needs. To find out more about our range click here or call the team on 0345 88 22 999.


Police Mutual Assurance Society Limited is an incorporated friendly society. Registered office: Alexandra House, Queen Street, Lichfield, Staffordshire WS13 6QS.


Article published on 1 September 2017

Joanne Palmer

About the author

Joanne Palmer is a Product Manager based in our Lichfield office. Joanne enjoys long walks with her dog Daisy and spending time with her family.

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