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The savings squeeze – what can savers do?

With inflation hitting a new 30-year high, we look at what savers can do to make more of their savings.

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.

With inflation hitting a new 30-year high of 5.5% in January, eye-watering price rises are continuing to squeeze our finances harder. Anyone who’s filled up the car or a supermarket trolley recently is all-too aware of changes in everyday prices.

But while nobody could miss the spending squeeze taking an ever-tighter grip, a different kind of squeeze risks going unnoticed. Savings are losing more and more value after inflation.

We hope you find this article helpful, but it isn’t personal advice. If you’re not sure whether something is right for your circumstances, ask for financial advice.

The impacts of inflation on savings

The average rates on Cash ISAs haven’t moved at all since December. The average easy access savings account is up by 0.01 percentage points to 0.21% and the average notice account has actually fallen 0.01 percentage point to 0.53%. It means they’re falling further and further behind inflation.

To make matters worse, far too many savers aren’t even getting these average rates. That’s because they’re sitting on a typical easy access rate with a high street giant of 0.01% – the impact of inflation on these accounts can be devastating.

Let’s say you’re making 0.01% (AER/Gross) on your savings, and inflation runs at an average of 5% for the next 12 months. Someone with £10,000 of savings would lose £499 of the spending power of their money.

If you switched to the most competitive easy access account, paying 0.75% (AER/Gross), you could hold onto an extra £75 of your spending power.

Reducing inflation’s impact

There’s no hiding from the fact that current savings rates aren’t keeping pace with inflation. It’s a trend that’s unlikely to reverse in the short term. However, higher inflation isn’t a good reason to give up your cash savings accounts altogether.

The first step is to make sure you hold the right amount of cash. The HL Savings and Resilience Comparison Tool, produced with Oxford Economics, found one in three people might be holding too much cash. To add to that, one in seven have more than the maximum recommended in cash, and no investments.

It’s important to have cash tucked away that you can call on in an emergency. We usually suggest having three to six months’ worth of essential expenses in an easy access savings account if you’re working. If you’re retired, one to three years’ worth is more sensible.

Once you have your emergency cash buffer set up, as well as money put aside for any planned spending over the next five years, it’s worth considering whether any spare cash could be working harder for you. This is where savings accounts with fixed rates could help.

Fixed rate accounts are different to easy access accounts. Your money is locked away for a set amount of time, without access until it matures. This means you’ll often have access to higher interest rates, provided you are happy that you won’t be able to access your money. It's also possible to mix and match across different terms so that you’re maximising your cash savings returns across different time periods.

Building financial resilience with Active Savings

Financial resilience doesn’t just mean having the cash you need for tomorrow. It also means making your money work harder so you have enough to improve your quality of life further down the line.

That’s where services like Active Savings can be really useful.

You can plan your savings for your long-term goals, as well as planning for the short term. It can be a great way to start getting into the habit of saving for the future, as you can choose to lock your money away in fixed term products. That means you won’t be able to access your money until the term ends.

It’s also beneficial for those who do want to do more with their money, but aren’t confident when it comes to investing in the stock market.

Depending on the amount of your cash savings, you might want to think about spreading it across different banking licenses. This can help protect your savings in case one of the banks you use defaults. The Financial Services Compensation Scheme (FSCS) is an independent organisation, set up by parliament, which can step in to pay compensation if authorised firms fail.

You can claim back up to £85,000 of eligible deposits per banking license. So if you have a current account and a savings account with the same bank, anything over this amount won’t be eligible.

Find out more about how your cash savings are protected

You’ll have a choice of competitive rates (often far higher than high street banks) from a range of banks and building societies and opening new products is easy and takes just a few clicks.

It’s possible to manage all your savings products online in one place when you log in, alongside any other HL accounts you hold with us – making things easier for you.

The best rates on Active Savings

Easy access

Up to
1.11% | 1.10%
(AER | Gross)

Avg. market rate
0.15%

1 year

Up to
2.25% | 2.25%
(AER | Gross)

Avg. market rate
0.58%

2 years

Up to
2.55% | 2.55%
(AER | Gross)

Avg. market rate
1.23%

3 years

Up to
2.60% | 2.60%
(AER | Gross)

Avg. market rate
1.24%

Easy access

Up to
1.11% | 1.10%
(AER | Gross)

Avg. market rate
0.15%

1 year

Up to
2.25% | 2.25%
(AER | Gross)

Avg. market rate
0.58%

3 years

Up to
2.60% | 2.60%
(AER | Gross)

Avg. market rate
1.24%

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. Easy access products pay a variable rate and fixed term products pay a fixed rate.

Source: Bank of England 31 March 2022. Comparisons with average market rates for easy access products are based on instant access products, which allow immediate withdrawals. Active Savings offers easy access products and withdrawals usually take one working day.

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.

The savings of private individuals held with authorised banks and building societies are covered under FSCS. All of our partner banks are authorised by the Prudential Regulation Authority (PRA) and covered under FSCS.

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 Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money.

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    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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