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Inflation will cost savers £326 by Christmas

·2-min read
Money
Money

Savers face a devastating blow as increasing inflation could wipe £326 off their nest eggs every year. This comes after the Bank of England warned the consumer price index could hit 4pc by the end of the year, double its target rate.

This extreme jump in prices will hit households that have savings in cash Isas or bank accounts the hardest.

Britons hold £8,100 in these types of accounts on average, which generates just £37 each year via the typical 0.46pc interest rate. Four per cent inflation would reduce this amount by £326 over 12 months even with interest payments.

High street bank savings account pay as little as 0.01pc interest, with savings rates near historically low levels. This would earn just £1 a year for every £10,000 saved.

Rates were pushed lower after demand for cash accounts allowed banks to reduce what they offer. They have crept higher in recent months, rising 0.1 percentage point for easy-access accounts last month to 0.17pc on average, according to personal finance analysts Moneyfacts.

Currently, no widely available deals beat the current inflation rate, which reached a three-year high of 2.5pc in June.

Rachel Winter, of investment manager Killik & Co, said savers may be forced to take on more risk if they wanted to protect their money. “While keeping a rainy-day fund in the bank is highly recommended, those with high levels of cash could consider taking more risk and investing in the stock market in order to generate above-inflation returns.”

The Bank of England forecast will also have a devastating impact on pension savings. A 4pc rate would knock 17 years of retirement income off savers' retirement pots, AJ Bell, the fund shop, estimated.

Someone with a £100,000 pension who needs an income of £5,000 a year on top of their state pension would run out of money after 37 years if there was zero inflation and the invested cash grew by 4pc net of charges.

However, 4pc inflation would be destructive, and the pensioner would run out of money 17 years sooner. Tom Selby, of AJ Bell said 4pc inflation was commonplace historically but it would be surprising to most savers and investors who had become used to significantly lower values.

Savers with personal pensions or workplace "defined contribution" schemes would have to invest more in stocks if they wanted to keep up with rising inflation.

However, those with an annuity would see their income eroded every year if they have bought it at a fixed rate and will suffer the most from a sharp rise in inflation.

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