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In this guide, we explain what inflation is and how it can impact your savings. Plus, we offer practical tips on how you can protect your savings from inflation, giving you more financial security in uncertain times.
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Inflation is the rate at which the general level of prices for goods and services rises over time. As things get more expensive, your money doesn’t stretch as far. This is called a drop in purchasing power.
To measure inflation, experts look at the cost of everyday items, like food, housing and transport, and track how those prices change.
Example: If inflation rises by 5% in a year, something that costs £10 in January might cost about £10.50 by December.
Inflation is always happening, which is why the cost of living gets more expensive over time.
Because inflation increases the price of goods and services, it decreases your purchasing power. That means that your money buys you less than it used to.
Example: A white sliced loaf of bread cost 64p in 2004. By 2024, the same loaf cost £1.40.
Interest rates and inflation are linked. When inflation goes up, the Bank of England often raise interest rates to bring it down. Higher interest rates make borrowing cost more and savings earn more interest. This can slow spending and help control inflation.
This can benefit savers, as savings accounts may offer better returns. But if prices rise faster than interest rates, your money might still lose value over time.
There are several things you can do to protect your savings from inflation and stop it from having such a big impact:
Keeping money in a current account that pays little or no interest means it can lose value over time due to inflation. These accounts are useful for everyday spending, but don’t help your savings grow or keep up with rising prices. If your money sits in a low-interest account, you miss the chance to earn more through savings accounts with better rates.
It’s worth looking for accounts that offer higher interest to protect your savings from inflation. Don’t just stick to the big high street banks. Many online tools let you compare rates from a wide range of providers, including digital banks. The savings market is now more competitive, giving you more choice and better deals.
You can choose from several types of accounts, like easy-access savings or Cash ISAs.
A fixed-rate savings account is another option besides a regular easy-access savings account. With this type of account, you need to keep your money in it for a set period.
Because you agree not to touch your money during this time, you usually get a higher interest rate, which stays the same for the whole term. This can give you a better chance of beating inflation.
Before you choose this account type, make sure you won't need the money during that period. Learn more in our guide to fixed-rate savings.
Before you invest, make sure you understand how it works and what risks are involved.
Remember, there’s no guarantee you’ll make money, and your capital is at risk. Plus, you can invest up to £12,000 a year tax-free across all your ISAs.
If you have money you won’t need for a while, consider putting it into an investment account like a stocks and shares ISA. Over time, investing has often outperformed cash and inflation.
No matter what type of savings account you have – whether it’s easy-access, fixed-rate or a Cash ISA – if the interest rate is lower than inflation, your money loses value over time. This means it won’t buy as much in the future as it does today, even if the interest is tax-free.
Inflation reduces your money’s spending power. So, if your account doesn’t keep pace with inflation, your savings are effectively shrinking.
Some savings accounts can keep up with inflation, but many don’t – especially when inflation is high. To beat inflation, your account needs to offer an interest rate equal to or higher than the inflation rate.
In recent years, interest rates have risen, meaning some savings accounts offer better returns. But inflation can still outpace them, especially if it spikes unexpectedly.
To give your savings the best chance, regularly review your accounts and switch to better rates when you can. Even small increases in interest can make a big difference over time.
Inflation can quietly reduce the value of your retirement income over time. If your pension or annuity doesn’t rise with inflation, your money might not go as far in the future – even if the amount stays the same.
That’s why it’s important to check how inflation affects your retirement plans. Here are some of the key factors to consider:
The best ways to protect your retirement income from inflation include:
If inflation is high, your retirement savings may not stretch as far as you expect. What seems like a comfortable pot today might not cover the same lifestyle in 10 or 20 years.
For example, if inflation averages 3% a year, £100,000 today would only have the buying power of around £74,000 in a decade. That’s why it’s important to factor inflation into your retirement planning.
Consider options like investing part of your pension, choosing inflation-linked annuities, or adjusting your spending habits to help your savings go further.
When inflation is high, it’s even more important to manage your savings. Keeping money in low-interest accounts can mean losing value each year. But by making smart moves – like switching to better rates, choosing fixed-term accounts or looking into investments – you can help protect your money.
Checking your savings plan often and keeping up with inflation news can help. Even small changes can strengthen your savings and help them keep up in uncertain times.
As your money is invested, the value of your investments can rise and fall, so you could get back less than you invest. Tax rules can change and the value of any tax benefits depends on your personal circumstances.
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