More than four in ten Brits (43%) still don’t fully understand how the value of their savings is eroded by inflation, according to research published by smart money app Plum. The research comes as economists warn the U.K. faces a fresh inflation spike against a backdrop of geopolitical volatility.
A poll of 2,000 adults found that surprisingly large numbers of people are not grasping how the dangers of sitting on too much cash when the available savings interest rate is lower than inflation.
This is despite a pound in someone’s pocket losing 43% of its purchasing power since 2006.*
Overall, 57% understood the corrosive effect of inflation, but among the Gen Z demographic of 18–29-year-olds, just a third (36%) correctly recognised that inflation reduces the value of their savings over time, compared with 71% of over 55s.
Plum Head of Money Rajan Lakhani commented: “There is a deepening crisis in financial literacy in the UK. It’s troubling to think that people who have lived through a period of double-digit inflation still don’t understand the effect it has on cash savings.
“This research will make difficult reading for the Chancellor who has made it her mission to transform Britain from a nation of savers to a nation of investors.”
The stakes are significant. According to the Bank of England, £10,000 in cash in 2006 would be worth only £5,733 in “real” terms today. In other words, the purchasing power of £1 in someone’s pocket has declined 43% in 20 years.*
Because this coincided with a period of ultra-low interest rates, money left on deposit in the bank would simply have lost a huge chunk of its purchasing power.
Rachel Reeves’ ISA reforms
To help people build a firmer financial future, Chancellor Rachel Reeves wants to get Britain investing in the stock market which has historically provided greater returns than cash savings and outpaced inflation.
The bad news is that despite government efforts to encourage more people to invest in stocks & shares ISAs, the message is failing to land with large sections of the public. Almost a third (30%)say nothing would persuade them to invest, preferring to stick with cash instead.
Misunderstandings about returns may be reinforcing this behaviour. Just 1 in 20 (5%) of Brits correctly identified typical annual returns of 10% or more** from a Stocks & Shares ISA invested in a global tracker fund over the last five years. Almost half (over 48%) underestimate these returns, while 46% say they don’t know. Meanwhile, a third (33%) overestimate cash ISA returns as being 4%+, when in reality it’s historically been 1-3%.
Instead, cash remains the most popular way to save for long term goals. Over a third (37%) say they use easy-access savings accounts for long-term goals and 20% use fixed term savings accounts. The latest HMRC data shows 9.9 million people have a Cash ISA subscription. In contrast, just 4.1 million people have a Stocks and Shares ISA.***
Rajan Lakhani added: “Too many Brits are relying on cash for long-term goals, often without realising how inflation erodes their savings or how accessible investing can be.
“Broader economic certainty, rising unemployment and the relatively low safety net in the UK are also feeding into would-be investors being more cautious and opting to keep their money in cash.
“If we want to improve financial outcomes and grow wealth, we need to make investing simpler, more transparent, and grow consumer confidence – especially for younger generations – so more people can take advantage of the long-term benefits investing offers.”
