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Is inflation nibbling away at your savings?

While inflation and interest rates are lower than we usually see, it’s still important to be aware of their impact on your savings. We explain why.

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.

Inflation is the general increase in price of everyday items. The UK’s rate of inflation (0.7%) is currently well below the Bank of England’s target (2%).

The rate of prices increasing has slowed down this year. Covid-19 has led to a slump in demand – petrol is a good example as we’ve been driving less. On the whole the pandemic is one of the main reasons for the fall in inflation.

The Bank of England suggests that slower growth in the UK economy, has also had an impact. When people aren’t spending as much, companies tend to increase their prices by less.

Chart showing the level of inflation

Source: Bank of England.

How inflation can affect your spending power

A low rate of inflation can be a good thing for household finances and your savings, but high levels can reduce how far your money goes. It’s important to be aware of the potentially negative impact of inflation on your savings over time.

An easy way to picture the impact of inflation, is to think about how it affects the price of everyday goods.

We normally measure inflation as the change in prices over one year. A 2% inflation rate means a basket of shopping that cost £100 pounds last year, would now cost £102.

But inflation isn’t the only thing we need to think about.

Why interest rates play a part

For savers, an interest rate is a percentage return you get on cash.

Interest rates on cash were low even before Covid-19 struck. But as the pandemic continues, the impact on the economy has seen rates fall further.

The Bank of England reduced the base rate of interest to 0.1% this year, which influences the level of interest all other banks can charge borrowers. This is the lowest level in the Bank’s 325-year history.

Low interest rates make borrowing cheaper for businesses and households. This normally helps stimulate the economy. On the other side of the picture, savers can expect to receive less interest on their cash.

It’s important for savers to understand that if the rate of inflation is higher than your current rate of return, you’ll end up worse off.

This is even more important over the long term, where inflation can really damage the spending power of your savings.

To get an idea of how this works in practice, try our inflation calculator.

£3.5 billion could be being missed in savings interest

We recently wrote about how nearly half of us don’t think it’s worth switching our savings at the moment.

This is worrying as despite the current low rate of inflation, it could still be having a negative impact on the spending power of our savings. For example, if you have cash in an easy access product paying 0.01%, even an inflation rate of 0.7% will reduce its spending power over time.

If you think inflation could be nibbling away at your savings, you want to make sure your savings are working as hard as possible.

We have different options available to try and help you achieve inflation-beating returns.

Active Savings can help. Through one online account you can choose easy access and fixed term savings products from multiple banks and building societies.

Remember that fixed term products generally only allow access to funds at maturity.


The best rates on Active Savings

Easy access

Up to
0.55% | 0.55%
(AER | Gross)

Up to 1 year

Up to
1.00% | 1.00%
(AER | Gross)

Up to 2 years

Up to
1.20% | 1.20%
(AER | Gross)

Up to 3 years

Up to
0.90% | 0.90%
(AER | Gross)

Easy access

Up to
0.55% | 0.55%
(AER | Gross)

Up to 1 year

Up to
1.00% | 1.00%
(AER | Gross)

Up to 3 years

Up to
0.90% | 0.90%
(AER | Gross)

Find out more

Please note the products above are some of our most popular, but more are available. Click the link above to see our full range. Products can be added or withdrawn at any time. Minimum deposit requirements apply to individual products.

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. Once you have opened a fixed term product the rate won't change, but rates on easy access products can vary.

Gross means the 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. Tax treatment can change.

Boost your potential returns

If you won’t need the money within the next five years and you’re happy with the extra risk involved with investing, this is one way you could improve your potential returns.

If you want to find out more about investing, here's how to get started.

Remember that unlike cash, investments fall as well as rise in value, so you could get back less than you invest.

If you already hold savings and investments elsewhere, now could be a good time to consider transferring them to HL. By having everything in one place, you’ll have more control over your investments. It could also give you more clarity on your returns and if they’re beating the current rate of inflation.

Before transferring, please check that you will not be charged excessive exit fees or lose any benefits of guarantees.

This article is not personal advice. If you are unsure of the suitability of an investment or course of action for you, please seek advice.

More about transferring

Get cashback if you transfer online

Transfer investments (including ISAs) worth £1,000 or more to HL and get cashback. The money is a thank you from us, so it won’t come out of your account or investments. The more you transfer, the more you receive. Act by 10 January 2021 to qualify. If you transfer away within a year we may reclaim your cashback. Terms apply.

Need more time to decide? Let us know and we'll give you up to an extra three months.

What you can transfer

  • Stocks and Shares ISAs
  • Cash ISAs
  • Help to Buy ISAs
  • Funds and Shares

Find out more

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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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