Is Inflation Eating Your Savings?

In recent years, UK inflation has surged to unprecedented levels, significantly impacting the economy and personal savings. The inflation rate soared to 11% in 2022, marking the highest increase in over 30 years. Although it has since decreased to 4.2% as of April 2024, it remains well above the Bank of England’s 2% target [1].

Inflation affects nearly every aspect of the economy, from the cost of goods and services to the value of savings and investments. High inflation rates lower the value of the pound, meaning that each pound buys less than it did previously. This effect is particularly detrimental to savers who see the real value of their savings diminish over time.​


How Inflation Affects Savings

Inflation erodes the purchasing power of your money. This means that the same amount of money will buy fewer goods and services over time. For example, if inflation is at 6%, £1,000 today would be worth only about £940 in a year, reducing your wealth and financial security. With Legal & General highlighting that 52% of savers are unaware of this erosion, not realising that their low-interest accounts are effectively losing money [2].

When inflation rates outpace the interest earned on savings accounts, the real value of savings diminishes. For instance, if your savings account offers a 1% interest rate, but inflation is at 5%, your savings effectively lose 4% of their purchasing power each year. This scenario underscores the importance of seeking higher returns to counteract the effects of inflation.


Strategies to Mitigate Inflation’s Impact on Savings


High-Yield Savings Accounts

One of the simplest ways to protect your savings from inflation is to seek out high-yield savings accounts. Current market offerings can provide returns over 5%, which, while still possibly below inflation, are significantly better than the minimal interest rates many traditional accounts offer. Shopping around for the best rates can greatly improve your savings’ performance.

High-yield savings accounts are an accessible option for many savers. These accounts offer better interest rates compared to standard savings accounts, helping to offset some of the losses caused by inflation. It’s important to regularly compare rates and switch to more competitive accounts as necessary​.


Inflation-Linked Bonds

Investing in inflation-linked bonds, such as NS&I Index-linked Savings Certificates, can protect your savings by ensuring that returns are adjusted according to the inflation rate. These bonds increase their principal and interest payments in line with inflation, thus maintaining the purchasing power of your investment​. This strategy is particularly beneficial during periods of high inflation, providing a safety net against the eroding effects of rising prices.

Inflation-linked bonds offer a direct hedge against inflation. For example, NS&I Index-linked Savings Certificates adjust both the principal and interest payments according to the Retail Prices Index (RPI), ensuring that your savings retain their value in real terms​.


Diversified Investment Portfolios

Diversifying your investments across various asset classes can also help mitigate the impact of inflation. Equities, for example, have historically outperformed inflation over the long term, despite their inherent volatility. Property can also serve as a hedge against inflation, as property values tend to rise with inflation​​. Additionally, commodities like gold are often viewed as safe havens during inflationary periods, though they can be volatile due to global market conditions​.

A well-diversified portfolio might include a mix of stocks, bonds, property, and commodities. Each asset class responds differently to inflation, providing a balanced approach to preserving and growing wealth. Stocks, for instance, often provide returns that outpace inflation, while real estate typically appreciates in value alongside inflation.


Utilising Tax-Efficient Vehicles

Maximising the use of tax-efficient savings vehicles such as ISAs (Individual Savings Accounts) can also protect your wealth from inflation. ISAs allow you to save up to £20,000 per year tax-free, which can significantly enhance the growth of your investments over time​​. Pensions also offer substantial tax advantages, with contributions eligible for income tax relief, further bolstering your savings against inflation​.

Tax efficiency can greatly impact your savings’ growth. By taking full advantage of ISAs and pensions, you can shelter more of your money from taxes, allowing it to grow more effectively and counteract the effects of inflation. These vehicles are essential tools for long-term financial planning​​.


Exploring Alternative Investments

Peer-to-peer lending platforms provide another avenue to potentially earn higher returns compared to traditional savings accounts. These platforms connect investors directly with borrowers, offering the opportunity for returns that can outpace inflation. However, it’s essential to diversify within this category and be aware of the associated risks​.

Peer-to-peer lending can offer attractive returns, but it comes with higher risks. By lending money to individuals or small businesses through these platforms, you can achieve returns that exceed those of standard savings accounts. However, it’s crucial to diversify your loans and understand the risks involved, always speak to a professional before making investment decisions.

Inflation poses a significant threat to the value of your savings, but with proactive strategies, you can mitigate its impact. It’s important to stay informed about economic trends and seek professional advice tailored to your financial situation to navigate these challenges effectively. Proactive financial planning is essential in ensuring that your savings maintain their value and provide security for your future.



[1] Office for National Statistics – Consumer price inflation, UK: April 2024

[2] Legal & General 2024