Finance: Expert discusses impact of inflation on a savings account
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With inflation on the rise, savings account interest rates have been low and probably won’t be able to match the increasing inflation. This could negatively impact the money in a person’s pockets as it is harder to save.
On The Which? Money Podcast, money saving expert Jenny Ross spoke about the difference between inflation and interest rates, and how this can impact someone’s savings
Ms Ross said: “It is really bad news unfortunately if the rate of growth on your savings doesn’t match or outdo the rate of inflation this means your money is going to be losing value in real terms.
“In context, if inflation is three percent for example something that used to cost £10 will now cost £10.30.
“And if you were saving for that item, if you have £10 in a savings account but that was only paying 0.1 percent, your savings are only going to be worth £10.01 so nowhere near enough to keep up with the increase in prices on things that you want to buy.”
Inflation is predicted to rise to four percent by the end of the year, negatively impacting savers (Image: GETTY)
The limited interest available on savings account can squeeze a person’s purchasing power as their savings can’t match the increase in prices.
As inflation is at 2.5 percent, ideally a person would want to find a savings account with 2.5 percent interest also however finding that on the market right now is impossible.
Ms Ross continued: “The really bad news about it is that at the moment, there is actually very little you can do about.
“There is no account on the market right now that can even come close to that.
“The highest you can get at the moment is just 1.66 percent and to get that you need to be in a position to lock your money away for five years because it’s on a five-year fixed term account offered by United bank UK, with a minimum deposit of £2000.
“If you want instant access to your cash then you’re going to have to settle for a much lower rate the best you can get right now is .5% plus available from Marcus by Goldman Sachs.
“So, it is a pretty bleak picture unfortunately.”
There are a few current accounts with interest rates that savers have been able to rely on for the past few years.
For example, the Virgin Money M Plus current account pays 2.02 percent on balances up to £1000.
If the rate of growth on your savings doesn’t match inflation rates, your money loses value (Image: GETTY)
While Nationwide’s Flex direct account pays two percent on up to £1500, but that’s only for a year.
After the year, the interest rate drops to 0.25 percent.
When discussing more options for cash savings, Ms Ross mentioned premium bonds.
She said: “The sorry state of savings rates has caused many people in the past few years to pile their money into NS&I premium bonds.
“They don’t pay any interest at all, but you do have the chance to win prizes of up to one million pounds.
“So in theory you could stand to generate a really impressive inflation beating return.
“Of course on the flipside there is also a chance that you’ll get absolutely nothing.
“But given that many savings accounts are literally paying nothing, there are accounts paying zero percent so premium bonds in that context are worth a punt.”