Your savings could be losing value, but what’s the alternative? Savings options explained

Clemency Hitchings 13 January 2017

According to the FCA, nearly all adults in the UK have a savings account, with around £700 billion currently held in savings. But what many of these savers may not know is that the value of this money could actually be decreasing over time.

Sounds crazy, doesn’t it? How can money you’re not spending lose value? It’s all down to inflation and low interest rates. At the time of writing, inflation is at 1.2%, and the average interest rate across cash savings accounts is 0.25%. This means that if you had £1000 in a savings account paying 0.25% interest over a year, your savings would physically accumulate value and you’d have £1002.50 at the end of the year. However, because the interest rate (0.25%) doesn’t match or beat inflation (1.2%), your savings would actually be worth less at the end of the year, as its purchasing power would be £990.61.

Could this mean it’s time to ditch the cash? And, if so, what’s the best place for your savings? We took a look at five alternatives to low-interest savings accounts.

1. Pay off debt

If you have to choose between building up your savings pot and paying off outstanding debt, your instinct may be to choose the former. We’re forever being reminded of the importance of an emergency fund, and it feels good to see your cash stacking up in a savings account. In some cases, however, it could make more financial sense to put your cash towards paying off debt. For example, £1000 outstanding on a credit card at 15% would cost £150 a year in interest, which could be avoided if the debt was paid off. The same £1000 in the average cash savings account would only accumulate £2.50. If you do choose to put your cash towards paying off debt, make sure there are no penalties for paying it off early.

2. Peer-to-peer lending

If you’re put off by next-to-nothing interest rates, an alternative to cash savings could be investing. Peer-to-peer lending is a relatively new form of investment, having only been regulated by the FCA in 2014. P2P sites work by matching investors with borrowers, individuals or companies, in return for often more promising returns than some savings accounts - the Guardian estimate that the average return on three year fixed-rate P2P accounts is 4.4%. Although it is regulated, there’s no savings safety guarantee , but most sites do have funds set up to mitigate your risk. Plus, some sites have a minimum investment as low as £10.

3. Small savings pots could be better off in a current account

Particularly for those who have smaller savings account, current accounts can offer better returns than some savings accounts, particularly when you take extra rewards and incentives into account. For example, the Marks and Spencer current account offers up to £170 in M&S vouchers, and the TSB Classic Plus offers 5% interest on balances up to £2000. Before you move your money, make sure you look at the minimum requirements for earning benefits. Some accounts require you to top up a minimum amount, and some require you to have active direct debits.

4. Fixed rate bonds for guaranteed returns

Individuals who are happy to forego access to their capital for between one and five years may find that fixed-rate bonds offer a better return than the average cash savings account. Generally, bonds with longer terms offer better returns, and unlike savings accounts, the interest amount will be fixed for the duration. One year fixed bonds can match the rate of inflation, so even if you’re not making huge returns, your savings shouldn’t decrease in value.

5. Investing your savings through online platforms

Investing your savings can seem like a scary idea, but now it’s easier than ever through simple-to-use online investment platforms, which allow you to start investing without hiring an advisor or broker. Through investment broker websites, you can buy and trade shares and funds, and see all your assets in one place. Different platforms have different pricing structures, though, so compare online brokers and shop around before you make a decision.