Aegon issues inflation warning for cash savers

Aegon has warned savers with large amounts of money sitting in cash not to be “lulled into a false sense of security” if interest rates creep up, because of the threat of higher inflation throughout 2022.

The pension provider suggested that continued low interest rates on cash savings and rising inflation will pose a risk to savers in 2022 even if the Bank of England (BoE) moves to hike interest rates in the coming months.
FCA estimates suggest that 8.6 million consumers hold over £10,000 investable assets in cash and the regulator is planning to explore ways of supporting some of these people to invest.

Aegon analysis found that £10,000 saved in a cash savings with 0.5% interest will increase to just £10,050 over the course of the year. With inflation at 4%, however, this would be worth £9,663 in today’s money terms, reducing purchasing power by £337.
If this money were instead invested and achieved a moderate growth rate of 4.25% after charges, £10,000 could grow to £10,425 over a year. However, Aegon suggested this would be worth £10,024 in today’s money terms with 4% inflation, so just maintaining purchasing power.

“Inflation is currently sitting at over 4% and forecasts suggest it could remain around this level or higher in the coming year, peaking close to 5% in the spring,” commented Aegon pensions director, Steven Cameron.

“During a period of high inflation people will notice a dramatic decrease in their purchasing power over time, particularly if their wages don’t keep pace or if they have savings in cash. The BoE may respond by hiking the base rate in the coming months, but even if passed on to savings accounts, any increase is likely to be small. Savers hoping for a boost to their cash savings should not be lulled into a false sense of security if interest rates, currently just scraping above zero, rise a little.

“The lurking threat of inflation next year and beyond could far outweigh any small changes in interest rates for those with large amounts of money in cash savings. Following many years of low inflation, people may have forgotten how damaging high inflation can be. But in the coming months and years savers should think carefully about where they put any additional cash that is not needed in the short-term.”

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