By Steven Cameron

With the European Championship currently gripping the attention of Scotland, there will be much Tartan Army reminiscing, testing memories of the last men’s appearance there,

25 years ago. Of course, younger generations will never have experienced the highs (and at times lows) of this, which brings me to something else that for many people has been absent from living memory – inflation.

Admittedly, you do have to go back even further, to the 1970s, to remember the scourge of inflation when it was in double figures, peaking at almost 25 per cent. But for those who experienced it, it’s something they remember all too well – for the simple reason that inflation can have a huge, damaging impact on your savings and wealth.

But there is now a growing realisation that higher inflation, which reduces individuals’ purchasing power and what they could buy with their savings over time, may be around the corner.

For those fortunate enough to have continued in employment during the pandemic there has been a positive impact on saving. Generally, people spent less money on a daily commute, leisure activities and eating out and their inability to spend meant “accidental savings” in their bank accounts. In fact, official statistics show how stark the increase in savings rate was, rising from 10% at the start of last year to 30% by the summer. Collectively it’s estimated a treasure chest of £125 billion in savings had built up by the end of last year, much of it languishing in cash savings accounts paying tiny, if any, interest.

While there may be bumps in the road ahead, the expectation is lockdown restrictions will continue to ease, and there’s a growing sense that consumers will make up for lost time with a huge spending spree as soon as the door to the economy is fully re-opened. While the sound of high street tills ringing will be very welcome, the threat of a spike in inflation should set alarm bells ringing for cash savers.

Inflation has been so low for so long, that many of us have forgotten to fear high inflation and what if means for our savings. Over time, inflation eats into your purchasing power by reducing the value of savings as prices go up. Keeping money in the bank typically earns interest, but if the interest rate is lower than inflation, you’re effectively losing money. Interest rates are currently at historic lows, just scraping above zero, meaning any amount of inflation raises challenges.

This week we saw consumer price inflation move from 1.5% in April to 2.1%. Elsewhere inflation has also been a trend, with increases in consumer prices in Germany now sitting at

2.4% and data from the US showing an even more pronounced rise to 5%, the highest rate since 2008.

The purchasing power of savings left sitting in a savings account paying, say, 0.5% a year in interest will decrease over time as inflation increases. If inflation rises to 3% the purchasing power of money in an account paying 0.5% interest will fall by more than a fifth (22%) over 10 years. And if inflation rises to 5%, you would lose almost half (48%) the “real” value of your money after 15 years and almost three-fifths (58%) over 20 years. While the Bank of England is tasked to keep inflation at 2%, a sudden

deluge of spending could keep the rate well

above target. Inflation can’t be completely avoided, but its impact on your savings and

long-term finances can be minimised by

planning and developing an investment

strategy that invests some of your savings

in investments likely to provide real or above inflation growth.

While there are no guarantees, at times of higher inflation, returns on stocks and shares investments are also likely to be higher. If inflation was at 3% but you achieved investment growth of 4.25% after charges, your purchasing power would increase by 13% over 10 years or 27% over 20 years.

Those who are most at risk from an increase in inflation are people with large amounts in cash savings, particularly if these are unlikely to be needed for any short-term needs.

The other group who are at risk are those on fixed incomes that don’t increase year on year. This may include some pensioners, although, historically, workplace pensions often have

some inflation protection and the state pension benefits currently from the “triple lock”,

which grants increases of the highest of inflation, earnings growth or 2.5%.

While you can’t personally control the future increases in prices, there are steps you can take to protect your savings against the damaging impact of higher inflation.

Steven Cameron is pensions director at Aegon.