Savers have stashed away almost £200billion since the pandemic began, according to the latest Bank of England figures.
Households deposited an additional £10.7billion with banks and building societies in April, bringing the total deposited since 31 March 2020 to £193billion.
Savers currently have almost £1.7trillion locked away in bank accounts, according to the Bank of England, fuelled by record levels of savings over the past year.
Savers who are prepared to fix in for five years may have a better chance of shielding their savings from inflationary pressures.
But with the UK’s rate of inflation rising to 2.1 per cent last month on the back of a surge in fuel prices, food, drink and clothing, there are fears that the value of this burgeoning pile of cash may already be starting to diminish.
At present the best easy-access account pays only 0.5 per cent interest whilst the best one fixed rate account pays 1.01 per cent – neither gets anywhere close to keeping up with the current rate of inflation.
‘The latest Bank of England report shows that we are saving more than ever with £1.7trillion now stashed away in various savings products,’ said Kevin Mountford, co-founder of the savings provider, Raisin.
‘However, this comes at a time when interest rates remain at an all-time low and even worse inflation is racing ahead and at 2.1 per cent has exceeded the Government target.
‘Whilst it may be difficult to determine the longer-term impact of the increase in inflation, it clearly has a further negative impact for savers and in the current market it makes it impossible to realise positive net returns.’
The pandemic ignited somewhat of a savings boom, as the constraints of lockdown and economic uncertainty resulted in many people spending less and saving more.
In the 12 months prior to the pandemic, the total savings deposited by Britons rose £70billion from £1.43trillion to £1.5trillion, according to Bank of England figures.
In the 12 months that followed, from 31 March 2020 to 31 March 2021, the amount saved rose by £180billion from £1.5trillion to £1.68trillion.
This represents more than a 150 per cent savings increase during the first 12 months of the pandemic, when compared to the previous year.
UK households have deposited £193 billion with banks and building societies since 31 March 2020, according to the Bank of England figures.
With Boris Johnson having delayed ‘Freedom Day’ by a further four weeks and the continued uncertainty it brings, the savings trend is expected to continue.
‘It’s still fear driving these savings,’ said Sarah Coles, personal finance analyst at Hargreaves Lansdown, ‘the reopening of the economy could see us dusting off our credit cards again, but there’s still an awful lot of uncertainty around how that reopening is going to go.
‘This means the lion’s share of this cash ends up in easy access accounts, because people are worried they’ll need it in a hurry.
Best buy rates
Easy-access: Cynergy Bank, Atom Bank and Charter Savings – 0.5%
One-year fix: SmartSave – 1.01%
Two-year fix: Cynergy – 1.1%
Cash Isa: Cynergy – 0.54%
‘We’re on course to hit £1trillion in easy-access savings accounts by the end of this year, and because most of it is still languishing in high street accounts, paying next to nothing, we could miss out on billions of pounds in interest.’
Around £930billion is sitting in easy-access accounts paying minimal interest, according to research by Hargreaves Lansdown.
A further £244.6billion is vegetating in accounts not paying any interest at all.
‘It’s pooling in accounts with the high street giants, rather than people shopping around for the best rates on the market with less well-known names,’ said Coles.
However, whilst this means many savers are missing out on the opportunity to maximise their returns, it is also creating a challenge for banks.
‘Banks and Building Societies are lending out money on long-dated mortgages and loans, using money that could be withdrawn at any second by savers,’ said Coles.
‘The good news for savers is that banks have all realised they need longer term deposits at the same time, which is pushing up rates on longer term fixes.’
What can savers do?
Savers may need to think proactively about how to better protect their money or risk seeing their cash becoming gradually worth less than it currently is.
There is currently not one savings account that can outpace the eroding power of inflation with many commentators predicting that worse is still to come.
‘We need to get our savings working harder,’ said Coles.
‘Once you have an emergency fund covering three to six months of essential expenses in an easy access account, and you’re considering tying up savings you won’t need for a year or longer, it’s worth taking advantage of the best deals around now while you can.’
In recent weeks, there has been signs for optimism.
Average savings rates either rose or remained unchanged between May and June for the first time since October 2020, according to Moneyfacts.
For example the average one-year fixed rate product rose from 0.44 per cent in May to 0.48 per cent in June.
The best five-year fixed rate account, offered by Gatehouse Bank, is currently paying interest of 1.5 per cent.
For those who are yet to take advantage of their tax-free Isa allowance, there has been some improvement in this area of the market as well.
Close Brothers is currently offering a five-year fixed rate cash Isa at 1.11 per cent.
Savers opting for a shorter-term horizon should consider the latest offerings by Shawbrook Bank and Paragon Bank.
Both increased the rates on their one-year fixed Isas last week to 0.56 per cent and 0.55 per cent respectively and Shawbrook presently leads the market with this rate.
‘There were over 100 savings deals that could beat 2.4 per cent in June 2019, which was the rate of inflation at the time, but there are no deals today, which may feel deflating despite a lower rate of inflation,’ said Rachel Springall, personal finance expert at Moneyfacts.
‘Regardless, it is still positive to see savings rates improve in the past few weeks, but it is obvious that speed is crucial to grab a top rate.
‘There are ways for savers to help this endeavour to avoid disappointment, such as to sign up to any rate alerts or newsletters to keep abreast of the changing market and keep them in the know.’
What about investing?
As inflation races ahead and savings accounts languish at rock-bottom rates, some may be tempted to invest.
An easy starting point is a stocks and shares Isa, which can be started with small sums of money.
Editor Simon Lambert as a six-point check list for starting out:
1. Have you got a rainy day fund in cash and is it enough?
2. Check what you can afford to invest and be happy with the risk (play around with some sites’ risk tools)
3. Find the ‘how’. Decide if you want robo-advice or DIY and pick a platform
4. Choose a broad global fund and balance it with a proportion of bonds or cash to lower your risk
5. Get started and invest regularly
6. Check up once or twice a year: think long-term but make sure investments are still right for you
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