Most people will open the letter, take a look at the headline figure, think “that’s rubbish”. What's more they will then forget about it for another 12 months until the next statement arrives.
From a financial planning perspective, it makes sense to have cash-based savings for emergencies and short-term needs. However holding too much in cash has the potential to seriously erode your wealth as inflation takes its annual bite.
To illustrate, let’s consider the following. Over the last 10 years, the average annual return on savings is just 0.5% while at the same time inflation has averaged 3.1% (Source: Bank of England). Based on these averages a saver with £50,000 a decade ago would now have £52,557, but they’d actually need £67,851 in order to buy the same basket of goods. In “real” inflation-adjusted terms, our saver has lost £15,294 or 29% of their wealth in a relatively short period. When put like this, most savers take note!
Fortunately, there are options to stop your savings being eroded by inflation. For example, a balanced and carefully selected range of investments has the potential to beat inflation over the medium to long term and deliver positive real returns. Additional benefits can be gained by ensuring your money is invested as tax efficient as possible using ISAs or pensions for example.