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How to protect yourself from falling savings rates

In a low interest rate environment, how can you protect the spending power of your cash?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

In August the rate of inflation – how quickly the price of everyday items is rising – fell to 1.7%, down from 2.1% in July. On the face of it this is good news for savers. It should mean it’s easier to earn an interest rate that keeps pace with inflation.

But there’s a problem. Lots of banks have been cutting rates on their savings. The upshot of this is that eight out of ten savings accounts now fail to keep pace with inflation. And while inflation at 1.7% might sound low, it could cut your spending power by 30% over the next 20 years.

Lower, for longer?

If you're expecting savings rates to bounce back any time soon, you’re likely to be disappointed. A rate cut is far more likely than a rate rise, which could put further downward pressure on savings rates.

But there is some good news. There are ways to get an inflation beating return while making sure you have access when you need it.

The first port of call is to have some easily accessible money. Expert financial planners usually suggest having three to six months’ worth of income. For any cash above that, you can use a variety of fixed-term products to boost your total returns.

What’s more, fixed terms usually won’t change. So, if the Bank of England cut rates, it shouldn't affect your fixed term savings. The longer you fix, the better the rates – but remember you can’t usually access your money until maturity.

Below is an example of a saver who splits their money equally between easy access savings, a one year fixed term and a two year fixed term. We’ve used products currently available through our Active Savings service – more on this below.

Example of a savings portfolio

Climb the savings ladder

Another approach for fixed-term savings could be to ‘ladder’ them. It works like this. Say you have some spare cash each month you want to save. It’s part of your long-term plan, so you don’t need immediate access to it. But if your circumstances change, you don’t want it tied up for too long.

So each month you save any spare cash you have into a 12 month fixed-term savings product which pays around 2%. After a year you have savings maturing each month. You can either withdraw, top up your easy access savings, or roll over into another fixed-term product.

You can change the amount you save each month, and earn a much higher interest rate than by having everything in easy access savings.

This is an example and everyone’s situation will be different. You might add to your savings every other month instead, or use longer fixed terms, but the principle’s the same.

Get your savings working harder, without the hard work

Whatever your cash strategy, our Active Savings service could help. You can pick and mix easy access and fixed term savings products from different banks and building societies – all in one account.

Once you’re set up there are no forms or paperwork when you want to move your savings around. It's simple, fair saving so you always know what rates you’re getting.

Improve the way you save and join Active Savings today.

This article is aimed to help you make informed decisions but it isn’t personal advice. If you’re not sure if a savings product is right for you, please seek advice.

Discover Active Savings

*AER (Annual Equivalent Rate) Shows what the interest rate/expected profit rate would be if it was paid and compounded once each year. It helps you compare the rates on different savings products.

Gross – The interest rate without any tax removed. Interest/profits are paid gross. You are responsible for paying any tax due on interest/profits that exceed your Personal Savings Allowance to HM Revenue & Customs.

Rates may be subject to change and depend on individual circumstances.

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248. The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Payment Services Regulations 2017 with firm reference 751996 for the provision of payment services. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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