Savers are leaving themselves at the mercy of lower interest rates as new data reveals UK cash savings have surged to a record high.
The annual Cost of Cash research from Janus Henderson Investment Trusts shows that cash savings have risen £51 billion since the start of the year to reach a record £2.05 trillion, breaching the £2 billion mark for the first time.
The research shows that high interest rates have been luring savers into cash accounts despite those offering lower returns than stocks and shares investments. Year-to-date, cash savings have returned less than a third of that of that returned by stocks and shares.
Furthermore, the vast majority of cash is residing in instant access accounts where interest income is diminishing as banks and building societies follow the Bank of England‘s rate cuts. Savers are only adding a very small portion of new cash savings, amounting to £1 in every £6, to fixed-term deposit accounts that lock in higher rates.
Janus Henderson said the UK’s instant access savings are worth more than the entire value of open-ended funds in the UK, while fixed term savings are worth six times the value of investment trusts.
However, interest rates have not delivered superior returns. UK savers earned £58.6 billion in interest between January and September, equivalent to an average interest rate of 2.93%. In contrast, the FTSE All Share returned 9.9% in a combination of capital gains and income.
Even when allowing for three months’ household income being reserved in cash as a safety buffer with the rest invested in stocks and shares such as investment trusts, UK savers have missed out on £110 billion of returns this year compared to investing in UK equities or £165billion compared to investing in global equities.
The firm said that a saver who invested £100 on the 1st January in any year since 1990 has returned significantly more in either global or UK stocks than if they had put £100 in a savings account. If inflation is taken into account, £100 saved in cash has lagged behind rising prices by 3.4% over the last 30 years.
Janus Henderson said more needs to be done to help savers understand the cost of cash. Nearly half (44%) of those surveyed that they believe cash savings accounts were the best way to save for the long term. Just one in eight (13%) preferred equities, including investment trusts and mutual funds, and just 5% opted for government bonds or corporate bonds.
Dan Howe, head of investment trusts at Janus Henderson Investors, said: “UK savers are keeping an enormous amount of cash in cash accounts. Put simply savers are not making the most of their hard earned cash. It’s easy to see why one might be inclined to do so but our research continues to show that their money could be doing more for them when invested, even in the high interest rate environment of the last few years.
“Cash savings are eroded in real terms by inflation and sat in accounts where interest rates continue to decline. Crucially, they tend to be outpaced by returns on equivalent equity investments, many of which also offer an additional dividend income. That is why understanding the cost of cash is so important.”
