Three in five (60%) UK savers avoid investing because they believe it’s too risky, according to a survey by trading platform IG, yet figures released today show that those putting their money in lower-risk cash accounts have lost money in real terms.
People who locked in their cash at market-leading rates five years ago are worse off after inflation, according to data from Moneyfactscompare, with £1 saved in 2020 now worth 89p in real terms.
Caitlyn Eastell, spokesperson at Moneyfactscompare, said that “sticky inflation will no doubt leave many savers disheartened”, with the average savings rate of 3.45% offering negative real returns for the third month in a row.
“Savers may be put off by the current conditions of the market, but leaving their cash languishing in an account paying 3.8% or less could leave them significantly worse off,” she said.
Around 976 accounts pay above-inflation rates, down from 1,606 a year ago, with more attractive returns on offer to savers willing to lock their cash away for longer. But following today’s inflation print of 3.8%, the top market savings rates on offer provide just a 1% gain in real terms.
The top five-year fixed deal from UBL UK pays 4.64%, although the best rate is on an easy-access account from Chip, which offers 4.7% when bonuses are included.
With uncertainty around what the Bank of England will do with interest rates, Eastell said savers should act fast to lock in deals.
“Savers can still choose from hundreds of inflation and base rate-beating deals, but they would be wise to act quickly as this number could fluctuate because of dropping rates and unpredictable inflation,” she said.
For those willing to lock away their cash, investing may be a suitable option, as historically stocks have made significantly higher returns than cash over the long run.
Yet, few are prepared to make this switch, researchers at IG found. Its survey showed that almost three-quarters (72%) of savers say disclaimers such as ‘capital at risk’ and ‘you may get back less than you invest’ deter them from investing.
This is adding to the underinvestment crisis in the UK, which has the lowest level of retail investment among G7 nations.
Michael Healy, UK managing director at IG, said: "We urgently need to change the perception of investing so more people in the UK can benefit from the long-term wealth-building opportunities it offers.”
The government has recently launched a review to scrutinise the risk warnings on investors, which could produce a “more balanced approach”.
This, Healy argued, could “unlock millions of potential investors”, with 35% of non-investors surveyed stating they would consider investing if warnings explained both risk and reward.
“One area we can address immediately is the way we frame risk for both cash and investments. The government is clearly focused on this issue,” he said. “We need to balance the risks and potential rewards of investing, rather than focusing solely on fear.”
However, there should also be risk warnings when it comes to cash accounts, he said, as 30% of the 2,000 people surveyed suggesting they would be more likely to move money from cash to investing if cash accounts highlighted inflation risk.
“We would encourage policymakers to be brave in driving meaningful change. Cash accounts should carry the same proportionate risk warnings as investment products, highlighting the real risk that inflation can erode savings over time,” said Healey.