Savers feeling concerned about the impact of inflation in a low-interest rate environment is warranted, but it is the longer-term impact that could be devastating if not taken seriously.
This year, cash savings rates fell to record lows and we are only now seeing small signs of stabilisation, so it is going to take some time to see any notable upheaval to cash savings rates.
Now that inflation has risen to its highest level in more than a year, it is clear to see why consumers need to think carefully about where they have their cash saved and how they can make it work harder.
The pandemic may have shifted mindsets when it comes to savings, perhaps steering consumers towards a preference to invest spare cash within an account allowing quick access with a trusted brand, such as a High Street bank.
Convenience and trust can come at a cost and, in this case, it would be the rate of interest someone receives, with some of the biggest High Street brands paying the lowest rates of interest within the easy access account market – as little as 0.01 per cent in fact.
There are alternative brands that pay better rates, such as with challenger banks, and if they are protected under the Financial Services Compensation Scheme, then there is little reason to overlook them.
Even so, savers will find it difficult to beat inflation with a standard savings account today and the government predicts the rate to surge past the 2 per cent target in the months to come.
Investing in the stock market may be an alternative way to outpace the impact of inflation, but it is important consumers understand the risks involved.
Those who diligently open an Isa each year may default to a cash Isa, but with the average stocks & shares Isa returning 13.55 per cent versus 0.63 per cent for a cash Isa last year, it is clear to see why some may change their risk aversion.
However, people still must remember fund performance can go down as well as up.
Lifetime Isas are also worth considering, as eligible savers can receive free cash from the government in the form of a 25 per cent bonus, complimenting any retirement provisions, but consumers must check the full details as early access is penalised.
Saving into a pension may feel like a struggle for some, especially if they have had their income impacted by the pandemic.
Those who are nearing retirement may have seen stock market volatility wreak havoc on their pension funds due to the pandemic and this stresses the importance of reviewing pension pots on a regular basis.
Indeed, the average annual pension fund growth returned 4.9 per cent in 2020, down from 14.4 per cent the year before, so some consumers may feel inclined to switch their funds.