There was an interesting piece on BBC Breakfast this morning, with Sarah Pennells of savvywoman.co.uk discussing the impact of high inflation on savings account returns. With CPI at 3.3% p.a. and RPI inflation at 4.7% p.a. for November 2010, only a very small minority of savings accounts are currently keeping up with inflation.

Remember, also, that even if you have a savings account paying 4% p.a., which is very high in the current climate, only a nil taxpayer would end up with a return in excess of CPI inflation. A 20% taxpayer would get 3.2% net, a 40% taxpayer 2.4% net and a 50% taxpayer just 2% net.

We always stress to our clients that it is important to build up an appropriate level of “rainy day” savings but that this shouldn’t be seen as part of their long-term investment portfolio.  The “right” amount will depend on all sorts of factors such as job security, mortgage commitments, other “non-negotiable” expenditure items and so on. However, it must be stressed that cash is never likely to be a good, long-term investment. In the current climate, most people are losing money in real terms on their savings accounts. That’s not to say that other asset classes such as equities, bonds and property can’t produce worse returns, as clearly there have been many periods of time when they have. But, we all need to be reminded that cash is not a “safe” investment, particularly in periods of high inflation or high taxation. The BBC piece conveyed this message very well.