Important information: the value of investments can go down as well as up so you may get back less than you invest. 

Both investments and cash savings have important roles to play in your finances and, used in the correct balance, the two can complement one another.

Recent improvements in the rates on cash accounts have prompted some to up their exposure to cash at the expense of investments. That can make a superficial kind of sense when you look at the headline rates being paid on cash, which are now at their highest level for several years. Some may simply prefer the guarantee of 5% from cash to the hypothetical returns from assets like shares or bonds.1

But the headline rate is not the whole story and can be misleading without considering the other factors affecting the real value of your money. Chief among those is inflation - the trend for prices to gradually rise over time meaning it generally costs more to buy something now than in the past, and more in the future than it does now.

Once you begin to take account of inflation, real returns from cash appear very different. We crunched historical data to show the effect of inflation on cash returns.

Can’t lose with cash? Not quite

It’s true that cash savings can’t lose value in the way that investments can - £100 in a savings account won’t ever fall below that cash level. But the buying power of that £100 can fall if inflation rises. By factoring in inflation you can calculate the real buying power of cash over time.

The chart below shows the returns made from £10,000 saved into cash-like assets back in 1998. Returns are represented by 3-Month LIBOR which has historically reflected cash rates.

Source: Refinitiv, 31.12.98 to 29.9.23.

The top line shows how the cash value of those savings has risen in that time, more quickly at first but then slowing when the era of low rates commenced following the financial crisis.

The bottom line shows the real value of the £10,000 once inflation has been taken into account - represented here by the UK Retail Price Index. After a period in which the value of savings rose in real terms, the onset of low interest rates meant their buying power eventually fell below the level they started with.

Can investments do a better job of beating inflation?

Cash and investments are not the same - both have different advantages and risks. Cash is not vulnerable to losses in the way that investments are. Investments, on the other hand, can lose value but historically have offered higher net returns over long periods. Many will need that higher potential return from investments to make their long-term financial plans work.

The two can work side by side. Having a sum in cash to cover unexpected costs - worth between three and six months of income, for example - will protect you in an emergency and means you won’t have to sell investments at a time not of your choosing. That improves your chances of investing success.

Saving above that level, however, may make it harder to achieve a long-term return that beats inflation. That’s because investments have a better track record of beating inflation than cash does.

The chart below shows returns from cash-like assets alongside those from shares. In both cases, returns before and after inflation are shown.

Source: Refinitiv, 31.12.98 to 29.9.23. Past performance is not a reliable indicator of future returns.

There are structural reasons why cash rates can struggle to beat inflation over long periods. The rates on savings accounts are ultimately determined by the providers of those accounts, but they are influenced in large part by the interest rates set by the Bank of England. The Bank will raise rates to combat higher inflation and lower them in periods when inflation falls. For this reason, inflation and cash savings rates tend to move in broad correlation. There will be times when accounts pay more than inflation and times when they pay less, but extended periods when rates beat inflation are unlikely.

Returns on investments are far less stable, but have tended to be higher to compensate those willing to risk their money.


1 MoneySavingExpert,  1 November 2023

Important information - - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one Fidelity’s advisers or an authorised financial adviser of your choice.

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