Savings

British savers still suffer from a lack of knowledge about the effects of inflation and tax on their savings when choosing the right nest egg for their money, according to National Savings and Investments (NS&I).

Almost a third of people said that although they know what inflation is they dont understand how it affects their savings while almost one in 10 said they dont know what inflation is at all.

More than a quarter of people also had no idea how tax affects their savings.

John Prout, NS&Is sales director, said: It is concerning that many people dont understand what inflation is, or how it might affect decisions about saving or spending money.

Inflation means that prices increase over time, so £100 today will buy you a little bit less in a years time. It can be caused by increases in salaries, increased demand for items or a decrease in supply which all push prices up.

People are more likely to think about how inflation affects the price of their shopping basket, but not how it affects the value of their savings. The Retail Price Index is one of the measures of inflation and with it averaging 3.98% last year, if we dont put our savings in a tax-free account matching or a non-tax free account beating this rate then our money will be worth less in the future.

It appears that an understanding of the impact of inflation and tax on savings increases as we get older. The younger generations, who have grown up in a time when the economy has seen low levels of inflation need to also be aware of the effect of inflation on our savings as well as our outgoings.