New figures suggest that most savers are concerned about the impact of price inflation on their cash savings.
The number of people concerned their savings will fall behind inflation over the next 12 months has risen from 29% last year to 78%, according to Legal & General.
With price inflation as measured by the Consumer Prices Index (CPI) currently at 2.4%, 90% of consumers believe it will be at this level or even higher in twelve months time.
A combination of low interest rates and stubbornly high price inflation means that the real value of cash savings have been eroded in recent years.
Savers have needed to accept that the capital security they receive from keeping their assets in cash comes with a high price; the purchasing power of their cash will fall each year as a result of inflation eroding its real value.
Savers finding themselves in this difficult position face difficult choices.
Doing nothing, and accepting the erosion, is certainly an option.
Savers can quantify the scale of the erosion each year and build this into their long term Financial Plan.
Current monetary policy is unlikely to continue for the long term. It will need to be paused and eventually reversed, giving savers some relief once higher interest rates are reintroduced.
Another option for savers is to accept an element of investment risk within their portfolios.
Certainly in the current investment environment, traditional ‘safe haven’ assets such as gilts and corporate bonds probably represent a higher than typical risk, with high prices and the prospect for future interest rate rises.
Regardless of the perceived level of risk, moving from cash savings to investments often represents an unacceptable exposure to capital loss for most savers.
Instead, savers should focus on shopping around to obtain the most competitive interest rates and ensuring their cash savings are held in a tax efficient manner.
