3 sensible reasons why you shouldn’t rely on cash for long-term savings

With interest rates remaining higher-for-longer, current deals on savings accounts could seem attractive.

If you’re feeling tempted to dive into cash for long-term savings, you’re not alone. Data published in Money, has revealed that savings accounts are used by 57% of UK adults, making them the most popular savings method.

This may be in part due to “investophobia”, which according to FTAdviser affects half of the British population and often leads to a preference for cash savings over stocks and shares.

Read on to find out three reasons why relying on cash for long-term savings may not be the most lucrative option.

1. Interest on savings rarely beats inflation

Typically, if you have cash in a bank or building society account or a Cash ISA, this is a generally secure way to save and earn interest on your money.

However, over time your cash savings could diminish in real term value as inflation rises. In fact, according to This is Money savers lost twice as much to inflation in 2023 as they earned in interest.

So, even when interest rates look attractive for savers if the cost of goods and services rises more rapidly, your money could be worth less in the long term.

The chart below shows how inflation could affect cash savings over 10 years, between 2006 and 2016.

Source: Lloyds Bank

This demonstrates how money held in savings could fall in real terms value over time, effectively leaving you with less than you started with.

2. You could be missing out on more tax-efficient ways to save

An increasing number of people are paying tax on cash held in regular savings accounts, partly due to higher interest rates causing more people to pay tax on their interest.

Everyone has a Personal Savings Allowance (PSA). This allows basic-rate taxpayers to earn up to £1,000 in savings interest each tax year (2023/24) without paying tax on it. Higher-rate taxpayers can earn up to £500 in savings interest and additional-rate taxpayers don’t have one at all. This means that if you’re a higher-rate taxpayer, you’re liable to pay Income Tax on all interest you earn on savings in the bank.

Tax deductions, in addition to the potential impact of inflation over the long term, may reduce the value of your savings.

Make the most of your annual ISA allowance

Making the most of your annual ISA allowance might help you to save in a more tax-efficient way. For the 2023/24 tax year, you can pay up to £20,000 into ISAs without paying any Income Tax or Capital Gains Tax on your interest or returns. You could invest your money in a single ISA or spread it between a Cash ISA and a Stocks and Shares ISA.

Increase your pension contributions and benefit from tax relief

You could also receive generous tax relief on pension contributions up to 100% of your salary or £60,000, whichever is lower (2023/24). So, paying extra into your pension pot could be a more tax-efficient way to save long term than adding to your cash savings.

Before ploughing all of your extra cash into a regular savings account, it might be worth speaking to a financial planner about other options that could potentially be more tax-efficient.

3. Investing your money could deliver higher returns long term

You may favour the relative security of cash savings accounts because you’re apprehensive about investing. This is common among those new to investing. According to research reported by MoneyWeek, women are disproportionately affected, with 74% too nervous to invest.

While there is typically a higher level of risk, as investment could go up or down in value, investing in assets such as bonds, shares and funds offers the potential for better long-term returns than cash savings.

By reinvesting returns, you could also benefit from compounding which, over time, could help you to grow your wealth.

Compounding can create a snowball effect, whereby you make returns on both your original capital and the interest earned. Reinvesting any dividends you make rather than taking them as income could further enhance the growth potential of your investments.

If you lack the knowledge and expertise to invest with confidence, a financial planner could help you balance the level of risk in your portfolio effectively.

The amount of risk you choose to accept often reflects the level of return you achieve. By working with a professional you can identify financial goals and better understand your attitude to risk, allowing you to find the investment options that suit your needs.

Get in touch

If you’re feeling confused about how to balance your savings and investments and achieve your financial goals, please reach out to us.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.