Savers in the UK rely far too heavily on cash. Between us, we have an astonishing £729bn sitting in savings accounts of various kinds, and it’s been earning only around 1 per cent a year on average since 2009. Fifty per cent of that money is in instant access accounts earning less than half that. The banking system is so awash with easy money created at the stroke of an electronic pen, in the form of the Bank of England’s QE programme, that banks and building societies can look on our deposits with relative disdain.
This disdain comes at a real cost to savers, as persistently low interest rates exact a heavy toll. Over the last five years, our deposits have earned us about £36bn in interest. That may not sound too bad, until you consider inflation consumed close to £116bn of value, leaving an astonishing net loss in real terms of £80bn. That’s a loss of over £3,000 per household in just five years thanks to the low rates paid by banks and building societies. In fact, one third of people have no savings at all, and there is wide variation among those who do, so those with larger balances have paid an even higher price.
Just to be clear, this is not just a feature of the aftermath of the financial crisis. It’s been going on for decades. Since 1990, a period that has included two major recessions, the dot-com crash, and the financial crisis, the cost of living has more than doubled in the UK (+122 per cent), and yet instant access cash has returned just 69 per cent in compound interest. In fact, in only five of the last 25 years have instant access interest rates exceeded inflation, meaning savers had an 80 per cent chance of seeing their cash fall behind rising prices in any one year.
Over the same 25 year period, house prices increased by 289 per cent and wages by 163 per cent. So those saving in cash for a deposit on a home found the first rung on the housing ladder being pulled out of their reach ever more quickly, while those tucking money away to enjoy in the future, perhaps to supplement a pension, found it failing to keep pace with living standards. Meanwhile, those invested in equities received a total return of 700 per cent on UK shares, and 470 per cent on global equities. Longer-term investment options, like investment trusts are one of the ways of accessing a good spread of these assets.
Human beings are naturally risk averse. It’s a cognitive bias that is hard to overcome when we consider our savings. Henderson Global Investors’ research shows people are more likely to think cash will protect the value of their savings than equities, despite overwhelming evidence to the contrary (of course remembering that the value of equity investments can go down). This flaw in our thinking compels us to cling to the nominal cash value of our savings. So in recoiling from taking investment risk, we unwittingly suffer the corrosive effect of inflation. Inflation may be down at historically low levels right now, but it’s not out. Our latest research shows you can be near certain you will lose money over the longer term by putting your savings in cash accounts, as the cost of living, and expectations for living standards, will quickly climb out of reach of the paltry returns on cash deposits. It’s costing us billions of pounds every year.
Ultimately, it’s up to us. Either we can provide cheap funding to banks and building societies, or we can vote with our feet and find a better way of saving for the future.
James de Sausmarez