Is there a worse way to use your money than by saving in a cash account? The returns on products like these have long trailed what long-term UK share investors make. Things are getting worse too as Bank of England rate cuts prompt savings providers to keep slashing their interest rates.
The low returns that cash savers make is particularly worrying as the power of the State Pension dwindles. Around 11m Britons believe they won’t have enough money to live on in retirement and the number is likely to grow.
It doesn’t have to be that way, though. As I explain here, buying UK shares in something like a Stocks and Shares ISA can help you build a big nest egg for retirement.
Savers make 94% less than investors!
The shocking difference between what savers and UK share investors can expect to make is laid bare in a recent report. According to Charles Stanley, British savers have typically made 94% less than investors have during the past 10 years.
The investment specialists have looked at what £10,000 would have made cash savers of the past decade. The figure comes out at £11,230 since 2010. By comparison, investing 10 grand into global markets instead would have created an enormous £30,742.
The threat of inflation
Now cash savings accounts are extremely useful. They’re a great place to save money that you might need for an emergency. However, using them to build a nest egg for retirement is a deeply flawed strategy.
It’s not only that you lose out on making better returns by investing in UK shares, for example, that makes cash accounts such poor wealth-creating vehicles. It’s that your savings actually lose value unless the interest rate you receive moves in line with or exceeds the rate of inflation.
Things threaten to get particularly perilous for cash savers from 2021 onwards too. Inflation in the UK (using the Consumer Price Index mode) is predicted to soar above even the best-paying Cash ISA next year. Statista reckons it will rise to 1.2% in 2021. And they predict it will grow every year through to 2025 when it will reach 5%.
It’s unlikely that savings rates will rise at the same rate through this period, however. The Bank of England will need to keep the benchmark rate at or around record lows to support the economic recovery.
Getting rich with UK shares
Charles Stanley suggests that 40% of people who don’t invest in shares are put off by fears over risk. I think such concerns are misplaced though. As I’ve explained, inflation can pose huge real-world risk to those who use cash savings accounts. On top of this, history shows that long-term UK share investors tend to enjoy an average annual return of at least 8%.
Besides, there’s a wealth of information from experts like The Motley Fool to help you avoid common traps and supercharge your eventual returns. I’ve continued to buy UK shares in my Stocks and Shares ISA to build a big retirement fund. And I plan to keep doing so in 2021.