Since the Bank of England (BoE) raised the base rate to 1.75% on 4 August, interest rates across the economy have been on the rise, from mortgage rates to savings accounts.

The BoE had dropped the base rate to just 0.1% in March 2020 as the UK economy closed down due to Covid-induced lockdowns. In turn, this has meant that money held in savings accounts barely saw a return over the previous two years.

Now, in the wake of another base rate increase to 2.25% on 22 September, interest rates on savings are far more favourable. Indeed, according to data provider Moneyfacts, the highest available rate for an easy access savings account was 1.81% as of 26 September 2022.

However, while these rates may seem attractive in the wake of historic lows throughout the Covid years, an investment account may still be a more suitable home for your money.

Read on to discover why.

Your money may still be losing value in real terms due to inflation

Despite the increase in interest rates across the board, your money may still be losing value in real terms compared to the cost of living. That’s because UK inflation is currently rising at a rapid rate.

The Office for National Statistics (ONS) measured the Consumer Price Index (CPI) to have increased by 9.9% in the 12 months to August 2022. So, even if you chose the 1.81% account, you would be able to buy less with your money over time with inflation this high.

Consider this example. If you held £1,000 in this account, you would have £1,018.10 in a year’s time. However, with inflation at 9.9%, £1,000 of goods and services last year now theoretically costs £1,099.

That means your money has less spending power than it did a year ago, despite the higher rates of interest you can now receive.

According to the Guardian, the BoE has forecasted inflation to reach 13% in October, with CNBC reporting that Goldman Sachs have warned that UK inflation could climb above 22% by next year.

At these rates, your money could lose real value even more rapidly.

Historically, investment returns have outpaced inflation and cash savings

As you’ve seen, the interest generated on cash savings might not keep your money level with rising costs. Meanwhile, data shows that invested money has historically outpaced inflation.

According to figures collated by FE Fund Info looking at the period from 2000 up to 31 March 2022, cash made total returns of 67.7% – giving average annualised returns of 2.4%. UK equities in the FTSE All-Share, on the other hand, returned 178.2% over the same period, an average annualised return of 4.7%.

For comparison, the BoE’s inflation calculator shows inflation to have averaged 2.1% a year from 2000 to 2021. So, while cash savings would have kept you just ahead of inflation over this period, investing in equities would have been even more effective in doing so.

Of course, past performance is not an indicator of what will happen in the future. Regardless, this data shows how equities can outcompete both inflation and the return you can generate on cash savings over a sufficient time frame.

You can still access money held as investments, even in a Stocks and Shares ISA

One thing that might encourage you to save rather than invest is that you might want to be able to access your money quickly, particularly in these uncertain times where costs seem to be constantly rising.

Holding a portion of your money in cash is by no means a bad thing. Indeed, it can be sensible to keep an emergency fund containing around three to six months’ expenses in case you need it in a pinch.

But beyond this, you’ve seen the value of investing your money to ensure that it at least maintains its spending power over time.

And indeed, investing your money rather than holding it in cash doesn’t make it entirely inaccessible. While it may be difficult to access the value in illiquid assets such as property, you can typically liquidate investments such as company shares or fund units and access the value in around a week.

This can even extend to Stocks and Shares ISAs. The “ISA allowance” for how much you can save and invest in ISAs in each tax year – standing at £20,000 in 2022/23 – does typically prevent you from putting more than this amount into your account in a single tax year.

But, with most investment ISAs, this allowance does not affect your ability to withdraw your money. You will still be able to withdraw money from your ISA if needed – you just might not be able to put it back in the account in the same tax year unless you have remaining ISA allowance or it is a “flexible” account.

It’s often preferable to invest your money over the long term, as you might be more prone to sudden swings in value over shorter periods. But even so, your money is not trapped in your investment account if you need to liquidate and access it for any reason.

Need help managing your money? Speak to us

If you’d like to find out how to balance your money between saving and investing, please do get in touch with us at Cordiner Wealth.

Email or call 0113 262 1242 to speak to us today.

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.