Should you be adapting your savings strategy to protect your cash from changes in the UK economy?

The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly.

Most of us would agree it is a sensible idea to set aside some money each month for emergencies or to make sure we have enough to live on in retirement.

But did you know you could be missing out on significant sums of money just because of the account you choose?

Let me explain how.

One of the most popular ways to save in the UK is with a cash ISA, which allows you to save up to £20,000 a year.

Unfortunately, however, the rates paid on most cash ISAs these days are very low by historical standards.

They are so low, in fact, that they even fail to keep up with the rising cost of goods, meaning the value of each pound you save gradually loses value over time.

This issue has been compounded in recent years due to the impact that Brexit has had on the UK economy. Since the EU referendum in June 2016, inflation has risen sharply while the Bank of England has had to keep interest rates low to stave off the possibility of a Brexit-induced recession.

Despite this, cash ISAs remain one of the most popular accounts among savers.

Recently, Scottish Friendly carried out research highlighting how much our addiction to cash ISAs is costing us in the current economic climate.

Our findings show that if you had saved the maximum amount (£15,240 at the time) into a cash ISA in September 2016 – three months after the Brexit vote – your pot would have grown by just £225 two years later in September 2018.

Worse still, due to the rising cost of living, the real value of that money will have actually diminished by 4 per cent to £14,620 over the past two years. After accounting for inflation, this equates to a real annual interest rate of -2.1 per cent over the same period.

By contrast, had the same amount been invested in a stocks and shares ISA tracking the FTSE All-Share Index instead, the investment would have gained £2,344 over the two years to end September 2018.

Even adjusting for inflation, the person who invested in a stocks and shares ISA would be sitting on a pot worth £16,623 in September 2016 prices – a real return of 9%, equating to an annual interest rate of 4.4 per cent.

The contrasting fortunes of cash savers and investors in stocks and shares can be clearly seen throughout history. The reason being is that over the longer-term the stock market has generally produced higher returns than savings accounts.

Despite this, many people remain fearful of investing their money.

Interestingly, a separate survey of 2,000 people conducted by Scottish Friendly showed four in ten people had a cash Isa, whereas only 18% had a stocks and shares Isa, despite the better returns on offer.

Of the 2,000 people we surveyed, 23% said they didn’t invest in a stocks and shares Isa because they didn’t understand them, while a further 22% shun them because they are scared of losing money.

There is higher risk attached to investing; that is true. But over the long-term, the evidence shows that you have the potential to make considerably more on the stock market than in a savings account.

Investing needn’t be daunting. If you want to give yourself the best opportunity to create a secure financial future for you and your family, then it is worth considering.

Past performance is not a guide to future performance. The value of shares can fall as well as rise and investors may not get back the value of their original investment. Cash savings with a bank or building society are generally secure and accessible. Tax treatment depends on individual circumstances and can change in the future.

No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting Advisers may charge for providing such advice and should confirm any cost beforehand.