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Savers are shunning fixed-rate accounts amid rising inflation. But is it a wise move?

Savers are shunning fixed-rate accounts amid rising inflation. But is it a wise move?
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A new report reveals that almost £20 BILLION has left fixed-savings accounts since the start of the pandemic. So does it make sense to avoid locking away cash in times of rising inflation? Let’s take a look.

What does the report tell us about fixed savings accounts?

According to CACI data analysed by Paragon Bank, the collective value of non-ISA fixed savings accounts in the UK now stands at £73.1 billion. This compares to £92.7 billion in March 2020. That’s a fall of 21%!

The data for fixed-term ISA accounts show a similar trend. The value of these accounts fell from £87.4 billion in March 2020, to £78.6 billion by July 2021.

Both of these stats suggest Brits are becoming more reluctant to lock away cash in the face of rising inflation.

What is the current inflation rate in the UK? 

According to the Consumer Prices Index, the UK inflation rate stands at 3.1%. However, the OBR recently suggested that inflation could rise to as much as 5% by next year. The government has an annual inflation target of 2%.

Rising inflation means goods and services become more expensive. This means that the value of our cash falls as we must pay more for the goods and services we buy.

How does rising inflation impact savings?

If you have significant savings, then rising inflation can be hugely detrimental to your wealth. That’s because in a high inflation environment, your savings are effectively losing value.

Traditionally, savers could protect themselves from inflation by stashing their cash in a top-rated savings account paying a decent interest rate. However, no savings account currently pays anything close to 3.1%, meaning many savers are finding themselves on a treadmill going faster than they can run.

Is locking away cash a bad idea when inflation is high?

Fixed savings accounts almost always pay higher interest rates than their easy access counterparts. Currently, the top easy access savings account pays just 0.66%, compared to 1.06% on offer for a one-year fixed account, or a higher 2% fixed account for five years.

Despite this, the report shows that savers are becoming wary of locking away cash. So are savers making a mistake? Perhaps not.

Whether you should lock away cash is very much down to your personal circumstances. On the one hand, if you know you won’t need access to your cash, then a fixed savings account trumps the easy-access alternative. On the other hand, if you need access to emergency cash, then a fixed savings account won’t be for you.

Those looking to avoid cash entirely may wish to look beyond both fixed and easy access accounts. While there is no perfect hedge against inflation, many look to stocks, bonds, housing or other assets as a way to store wealth.

It’s also worth bearing in mind that many savers may be put off by fixed savings accounts due to the growing likelihood of the Bank of England raising its base rate. However, Derek Sprawling, savings director at Paragon Bank, suggests fixed accounts are already factoring this in.

He explains: “Our tip for savers would be to not overlook fixed rates, especially now that providers are building in the expectation of an increased base rate.

“The market is forward-looking and rates available in the best-buy tables are no longer reflective of the base rate. It’s important for savers to make the most of competitive rates while they are available as it’s possible the market will remain volatile in the upcoming months.”

What else does the report show?

Aside from highlighting the lack of appetite among savers for fixed accounts, the report reveals that Brits have generally increased their savings during the pandemic.

According to Paragon Bank, the average savings balance in the UK now stands at £12,145. This is over £1,000 higher than in March 2020, when the average balance was £11,141.

Regular savings accounts proved particularly popular during the pandemic. Brits have saved an extra £4.5 billion into these accounts since March 2020.

Keen to learn where you can find the highest interest rates? See the list of our top-rated easy access savings accounts, and our top-rated fixed savings accounts.

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