Double whammy eroding third of UK cash savings over five years

In recent years, UK savers have been able to rely on income from cash deposits to sustain their lifestyles.

However, recent events mean this is now a thing of the past and many people are now seeing their savings eaten away at an alarming rate. New figures from Skipton Financial Services show that a saver with £100,000 in a cash account, taking 5% monthly income, would only have £69,242 remaining five years later, as their savings are strangled by the double whammy of historic low interest rates and inflation.

Earlier this month, the Bank of England reduced interest rates to 2%, their lowest level since 1951. Whilst the Bank was forced to reduce rates quickly in an attempt to stop the economy sinking into a deeper recession, the three consecutive rate cuts since 8 October have hit savers hard, with over 200 savings accounts now paying 1% interest or less before tax. With the Bank of England expected to further cut rates to at least 1.5% next month, and some experts forecasting that rates could fall below 1%, savings rates are almost guaranteed to fall further still, piling on the misery for those relying on their savings to fund their outgoings.

Mark Fleet, managing director of Skipton Financial Services, commented, "With the Bank of England set to further cut rates next month, and rates tipped to fall below 1% next year, UK consumers are set to face a sustained period where they will simply not receive the income they have become used to from their savings accounts. Whilst inflation is falling, it is currently riding at 4.1%, meaning many customers' life savings will not be keeping pace with inflation, never-mind growing ahead of it.

"Many savers will therefore have to consider diversifying part of their portfolio away from cash and looking for alternative forms of investments. People may currently be feeling risk-averse when it comes to their money but there are ways of controlling any extra risk. One thing is for certain, anyone relying solely on cash accounts for income over the next few years, is going to have to make serious cutbacks or accept that their hard-earned life savings are going to disappear in front of their eyes."

One argument in favour of equity-based investments at the moment is the difference between the current average dividend yield from FTSE 100 companies and a savings account tracking Bank of England base rate, which is wider than it has been for many years. £100,000 in a deposit account paying the current base rate of 2% would generate £2,000 gross interest or £166.67 per month. However, the average FTSE 100 dividend yield is currently at 4.48% which equates to £4,480 or £373.33 each month.