Inflation held steady at 3.8% in September, according to the latest ONS figures. Food prices are rising more slowly, and headlines sound calm for once. But for anyone sitting on large cash balances, that calm is deceptive. Most savings accounts pay around 2% interest, and even the better ones struggle to beat 4%. After tax, the real return is negative.
On paper, cash feels safe. You can see it, count it, and know it’s there. But inflation quietly eats away at its value. At 3.8%, £100 today will buy only £81 in ten years. That’s the cost of comfort, the slow, silent loss that few people notice until it’s too late.
Many investors moved into cash during recent market uncertainty. It made sense. With volatility in bonds and equities, holding cash offered peace of mind. The problem is that safety in the short term becomes risk in the long term.
Inflation acts like a tax on inactivity. You might not lose pounds from your balance, but you lose purchasing power. It’s why many retirees and near-retirees who rely heavily on cash eventually see their lifestyle options shrink.
Short-term liquidity is essential, but it should never become a long-term strategy.
Let’s look at the numbers. With inflation at 3.8% and an average instant-access savings rate of 2.3%, the real return is roughly -1.5%. If you pay tax on that interest, your actual loss is closer to -2%. That means the value of your money is falling every single year, even though your account statement is rising.
It’s not about taking reckless risk, but recognising that “doing nothing” is still a decision — and one with a predictable outcome.
Cash is for emergencies, short-term plans, or tactical flexibility. Beyond that, it’s a holding zone, not a wealth strategy. Long-term money should be working somewhere inflation can’t quietly erode it, whether that’s in diversified portfolios, pension wrappers, or ISAs designed for growth.
Good planning doesn’t reject cash; it respects what cash is for. The goal is balance — enough liquidity for peace of mind, but enough investment for long-term resilience.
If you’re holding large sums in cash, ask yourself one simple question: Am I earning enough to keep up with inflation and tax?
If the answer is no, it’s worth rethinking your balance between safety and strategy.
Inflation may be steady, but your wealth shouldn’t stand still.
If you’re unsure whether your money is working as hard as it could, get a second opinion. Understanding the balance between safety, tax and growth isn’t about chasing returns — it’s about protecting what you already have.
At The Wealth Coach, we help people make sense of that balance. If you’d like to understand how inflation affects your financial plan, start by asking the right questions. The conversation costs nothing, but the insight could be invaluable.
Or subscribe to our newsletter for weekly insights.
Nic Round is a Chartered Financial Planner and Chartered Wealth Manager, authorised and regulated by the Financial Conduct Authority.