£1.1 trillion held in savings accounts could be at risk of losing value

More than £1.1 trillion is sitting in UK bank and building society savings accounts earning an average of just 1.2% interest, according to new analysis of Bank of England data by the investment platform Lightyear.

For context – 1.2% is well below the current rate of inflation (rising prices), which was 2.9% for the year to July.

What does that mean? In simple terms; your money is losing ‘purchase power’ if it’s not at least keeping up with the rising cost of living. In even simpler terms, by keeping your money in one of these accounts, it could no longer be worth as much as you think.

Even more shockingly, the analysis also revealed that £305 billion in those savings accounts is earning no interest at all. Zero.

With the cost of living rising so fiercely over the past few years, that money could be worth significantly less than when the account was opened. And those who had hoped to use their savings to pay for future expenses could be left disappointed.

The danger

After years of very low interest rates, many people have got out of the habit of checking what their savings are earning. If that’s you, it’s potentially costing you money, and could put a spanner in the works when it comes to paying for your future plans.

What to do now

It is always worth checking what the top savings rates currently are and seeing if you can be getting more for your money. We regularly find providers offering outstanding above-inflation rates.

The good news is that switching is not usually difficult. It can be as simple as a few clicks online, although it is very important to establish whether there are any exit charges or penalties associated with your existing account before making the move. These are relatively rare, but you don’t want a nasty surprise.

For a small amount of your time, the benefits could be significant. For example, if you have £10,000 currently earning 1.2% interest, you will receive around £120 over a year, before tax. Making a move to an account that pays 3.75% annually – the Bank of England’s current base rate – you would receive £375. That’s a difference of £255 in one year. And just as importantly, it’s kept up with the rate at which prices are rising.

Where should you put your money?

The key is to think about what you might need different pots of money for.

It’s important to keep enough cash easily and quickly available for emergencies. In reality, the kind of account that offers you instant access is not as likely to pay the highest interest rates, although there are still some good deals to be had.

Any cash that you don’t think you’ll need for a while could be put into an account that pays more.

A fixed-rate or notice account typically requires you to leave your money in savings for a set period of time, or requires you to give a certain amount of notice for withdrawals. But, if you know you won’t need that money for urgent and everyday expenses, the financial gains could be well worth it being less accessible.

For money you won’t need for the longer term, investing in something like a Stocks and Shares ISA is another option, although investing comes with the risk that you could lose money as well as gain it. We’ve got a guide here on how to decide if a Stocks and Shares ISA is right for you.

The takeaway: don’t assume your savings are fine where they are. Checking your interest rate could see your savings earn you hundreds – or even thousands – of pounds more over the long-term.