‘Cash is king’ mentality could prove costly

For many years, savers have seen cash as a safe, reliable option when building up a nest egg for the future.

However, inflation has the potential to seriously reduce the value of cash savings over the years. Whilst a modest level of price inflation is considered a marker of a healthy economy, high inflation rates will gradually erode the spending power of money – especially when combined with low interest rates. The higher the differential, the worse the impact will be.

For several years, the Bank of England’s (BoE’s) target for inflation has been around 2%, allowing for inevitable short-term fluctuations; rates have typically been subdued since the 2008 financial crisis, as have bank interest rates. However, the Consumer Prices Index (CPI) – the official measure of UK inflation – has grown much faster this year as the economy recovers from the pandemic, a trend which may well persist beyond 2021. On the other hand, the BoE reduced its base interest rate to a record low of 0.1% during the first lockdown. Together, high inflation and low interest mean that those with excessive cash in the bank will see the spending power of their savings eaten away rather quickly.

Cash is no longer king

It is therefore surprising that a NatWest survey of over 2,000 people found that, of the 76% of parents and guardians who are saving and/or investing for their children, four in five are doing so exclusively in cash. Whilst commending parents for putting money away for their children, NatWest commented, ‘The purchasing power of these ‘safe’ cash balances actually goes backwards over the longer term.’

There is no denying that a healthy bank balance, in addition to appropriate protection insurance policies, serves as a reassuring buffer against financial shocks. However, a bank or savings account is rarely the best place for significant sums.

The value of investments and income from them may go down. You may not get back the original amount invested. A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.