This is what all savers must do to escape the “silent tax” of inflation, according to an expert. Numerous savers think they are making the right choice by storing substantial sums of money securely in cash savings accounts.
However, according to a wealth management expert, inflation could be quietly diminishing the actual value of those savings year after year. While interest rates on savings accounts have strengthened compared to recent years, an expert cautioned that many individuals still undervalued the long-term harm inflation could inflict on purchasing power if their money was not generating sufficient returns.
Paul Denley, CEO at London-based Oakham Wealth Management, said inflation acted like a hidden tax on savers because rising prices steadily reduced what money can actually buy over time.
He added: “Inflation is the silent tax many people underestimate. A headline gain means little if purchasing power is falling faster underneath it.”
While cash savings remain vital, particularly for emergencies and short-term spending requirements, Mr Denley cautioned that depending too extensively on cash for long-term wealth preservation can prove expensive over time.
He said: “Cash absolutely has a role for emergency reserves and short-term spending needs. But long-term wealth preservation requires people to think in real terms, in other words, after inflation.”
One of the most common errors savers make, according to Mr Denley, is allowing money to sit idle in poorly-performing accounts out of habit or convenience. While some banks have raised savings rates considerably, others continue to offer dismal returns on default accounts, particularly for longstanding customers who seldom switch providers.
Mr Denley added: “The good news is that savings rates have improved. But complacency remains expensive. Savers should actively compare providers and avoid leaving large balances languishing on poor rates simply because it feels easier to leave things where they are.”
He also urged people to take fuller advantage of tax-efficient ISAs wherever possible.
He continued: “Using ISA allowances effectively can make a significant difference over time because returns grow free from tax.”
For those with longer investment horizons, Mr Denley said many people ought to think beyond cash alone when seeking to shield themselves from inflation. Historically, diversified investments such as equities have generally delivered stronger long-term protection against rising prices than cash savings, though they carry greater short-term volatility.
He said: “For longer-term capital, particularly over periods of five years or more, diversified equities have historically offered a stronger defence against inflation than simply holding cash.”
Mr Denley was keen to emphasise, however, that investment decisions should always be tailored to an individual’s personal circumstances, financial objectives and appetite for risk.
He said: “The trade-off is volatility, which is why time horizon and risk tolerance matter enormously.”
He further noted that many people have an instinctive aversion to stock market swings, while failing to appreciate the subtler yet potentially far greater threat posed by inflation.
Mr Denley said: “Market volatility is very visible and understandably makes people nervous. But over the long term, the slower and less obvious erosion of purchasing power can actually prove far more damaging to wealth.”