High street bank savings are set to shrink in real terms because of a "toxic combination" of low interest rates and rising inflation, according to Octopus Choice.
Work by the peer-to-peer lending platform has shown £10,000 deposited today in an average one-year fixed-term savings account paying 0.74% would be worth £9,933 in real money terms when withdrawn a year later, assuming current Bank of England inflation forecasts (0.8%) and the average interest rates of major high street banks.
On the same basis, a deposit of £5,000 would be worth £4,966 in real money terms, when withdrawn 12 months later.
Over a 24-month period, the firm's forecast is similarly gloomy. Although rates are higher for a two-year savings account - paying an average of 0.90% - Octopus Choice found a £10,000 deposit would shrink to £9,819 in real terms.
At the same time, a £5000 deposit would become £4,909, working on the basis of Bank of England inflation forecasts (1.9%) between now and 2018, and average interest rates.
Octopus Choice head Richard Wazacz said: "People are well aware that returns on the average high street savings account are negligible, but are they aware their savings will fall in value in real terms over the next 12 and 24 months?
"It could get even worse if inflation rises faster than current forecasts and, after the latest inflation data, that certainly seems possible."
According to Wazacz, savers looking to ‘break even' would need to find a product that pays a minimum of 1.41% over a one-year period, or 1.81% over two years. At present, average fixed-term savings accounts are falling significantly short - at 91 basis points less over one year, and 101 basis points less over two.
Wazacz continued: "For those who want to make their excess cash work harder, the answer is to look beyond a bank.It goes without saying that anyone looking to better their returns by investing should pay close attention to the risks involved. People now need to wise up to the ‘savings risk' they now face. For savers, times have arguably never been so tough."
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