Worried about the impact of inflation on your savings? Here's what to consider

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Kirsty Kerr

May 10, 2022

5 mins read

With inflation rates and the cost of living rising rapidly and forcing households to tighten their belts, it’s natural that you might feel concerned about your finances and your future. We explain how rising inflation impacts your savings and what you can do about it.

Energy bills, rent, fuel and food are just some of the areas where prices have already increased because of rising inflation rates, making life more expensive for everyone and forcing households to adjust their spending habits.

If you’re starting to feel the impact of inflation on your regular income, you might be wondering how your hard-earned savings could be affected too.

So, with predictions that high inflation is likely to continue throughout 2022, what can you do to help reduce the impact on your savings in the short and long term?

What is inflation?

Inflation is the rate at which prices increase over time. For example, if the rate of inflation is 1%, that means that the price of goods and services has risen at 1% on average. So if a loaf of bread cost you £1 a year ago and the inflation rate is 1%, it’ll now cost you £1.01.

To try and keep inflation low and stable, the Government tends to set a target inflation rate of around 2%. But in April 2022 inflation rates hit a record high of 7% – the highest level seen in 30 years.

How does inflation impact your savings?

Inflation is an important consideration when it comes to your savings because it affects the purchasing power of your money. If your savings don’t grow at the same rate, or a higher rate, than the rate of inflation, then you could effectively lose money because you won’t be able to buy as much with it as you could before.

For example, something that costs you £1000 today will cost you £1070 in a year’s time if the inflation rate stays at 7%.

If you were to put that £1000 into a savings account earning 0.5% interest, in a year you’d have £1005. So you’d effectively lose £65, even with the interest on top – and that’s just one year in. The amount could increase over time.

Inflation could also impact your ability to save. The rapidly rising rate of inflation has driven up the cost of living, meaning people are starting to borrow more and save less to try and maintain their current lifestyle. This could mean you don’t feel you’re able to save as much as you were before, since a larger proportion of your income will need to go towards your day-to-day expenses. This is why it’s so important at the moment to make sure that the money you can save is working as hard as it can for you and your future.

What you can do to help reduce the impact of inflation your savings

If you want to give your savings the opportunity to grow along with the rate of inflation (and, importantly, give them a chance of beating it) then one of the best ways to do this is to invest them over the medium to long term, which is generally five years or more.

Cash savings will likely only grow with interest rates, which were just recently raised to 1%. This is the highest rate seen since 2009, but still much lower than the rate of inflation. So you’ll find that the value of your cash savings will be slowly eaten away by inflation, as we mentioned earlier.

Investments, however, have the potential to grow at a higher rate over time. Historically, those who have invested their money have seen better returns than those who put their money in cash savings. Although past performance isn’t a guide to future performance.

Your pension plan, Stocks & Shares Individual Savings Accounts (ISAs) and any other investments can be considered a good home for anything you can afford to save at the minute. That way you might find that in the years to come your money has managed to keep up with or even beat inflation - although that’s not guaranteed.

When it comes to inflation and your investments, there are different things to consider depending on the type of investments you have. Read As inflation soars – is now the time to review your investments? to find out more.

If you’re a Standard Life customer, you can manage your pension payments and investments online or via the app. If you’re new to investing, read our investment basics guide to get started.

Remember the value of investments can go down as well as up and you may get back less than was paid in.

Tips to help make the most of your money in the short term

Investing can be great as a long-term solution, but what can you do now to help your money go further when your budget is being squeezed?

1. Revisit your goals 

As you start to notice the effects of increased prices, you might find that your current goals could take you longer to reach than you’d originally planned, or they might need to be adjusted slightly. So it could be a prime time to revisit them now and consider if your plans need to change.

2. Have a direct debit detox  

Many of us rack up memberships and subscriptions that we could probably live without. If it helps you reach your goals, consider cancelling them or shopping around for a better deal. You might be surprised at how much money you could save.

3. Make the most of tax efficient savings

You might find there are different benefits you could get depending on how you save your money. And that could help you make the most of what you’ve got.

Remember that you get tax benefits on your pension payments, which effectively means it costs you less to save more into your pension plan. Even if you’re more focussed on short-term finances at the moment, it’s important to continue contributing to your pension: time in market is the most important factor in investing, and if you choose to stop contributing you may miss out on valuable contributions from your employer. Although it’s worth bearing in mind that you can’t access your pension savings until you’re aged 55 (rising to 57 in 2028).

If you want to access your money before age 55, Stocks & Shares ISAs are a great, tax-efficient way to save for medium or long-term goals like weddings, education fees or a new car without having to tie up your money. Or you could consider a Cash ISA for shorter-term goals like rainy day funds.

Depending on the type of ISA you have, you can save up to £20,000 in a tax year across all of your ISAs and you won’t pay any tax on any interest you earn. Some types of ISA have lower limits though, so do check.

If you’re saving up for your first home you might find a Lifetime ISA is a good way to give your savings an extra boost. You can get a 25% government bonus added on to up to £4,000 of your savings every tax year if you meet certain criteria.

4. Prioritise your spending

You might have made a list of things you’d like to purchase by the end of the year. If so, it might be a good idea to go through the list and think about anything you could put off buying for a while. If it’s not essential, you might be better waiting until you’re confident it won’t impact your standard of living.

If you’ve been thinking about making a big purchase such as a car or a required home improvement and you have the money to do so, you might find you’d be better off getting it now rather than waiting until later in the year when prices could be even higher – it could save you money in the long run.

5. Try to clear off any outstanding debt 

When inflation rises, interest rates are generally increased to help control the economy. If you have any variable rate debt, you might find that your regular payments go up as a result. So it’s best to make getting rid of any debt you have a priority. 

MoneyHelper has some useful information on dealing with debt if you’re not sure where to start.

The information here is based on our understanding in May 2022 and shouldn’t be taken as financial advice. If you are unsure, you should speak to a financial adviser and there is likely to be a charge for advice.

The value of investments can go down as well as up and could be worth less than what was paid in.

Standard Life accepts no responsibility for information on external websites. These are required for general information.




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