Improved inflation not helping savers and increases chances of base rate rise, research suggests

News - Banking

Written by Ray Clancy

Wednesday, 24 March 2010 09:25

Even although the UK inflation figures have improved slightly there are no instant access savings accounts that are inflation proof and pressure will now be on the Bank of England to increase the base rate, it is claimed.

Savers will need an account paying at least 3.76 % for basic rate tax payers, 5.01% for higher rate tax payers and 6.01% for those paying 50% tax from April 6 to avoid their money being eroded, according to research from moneysupermarket.

It says that no easy access savings account currently pays enough interest to offset the effects of inflation and taxation. For those saving and borrowing, with RPI remaining constant at 3.7%, basic rate tax payers would need an account paying at least 4.63%, increasing to 6.17% for higher rate tax payers.

‘Despite a fall in CPI, savers are still hard pressed to generate any real returns. There is a danger that many will do nothing because of the belief that there is little point, but this is not the time to be apathetic,’ said Kevin Mountford, head of banking at moneysupermarket.com.

‘The decrease in CPI also means that the likelihood of The Bank of England increasing the base rate in the near future reduces which will be good news for mortgage borrowers, but is undoubtedly bad news for savers. The likelihood that rates will remain low in the short term means it is more important than ever for savers to proactively seek the best returns possible on their money,’ he explained.

‘Given the low number of products which offer a return above inflation, savers really need to keep a close eye on the interest rate, especially on fixed-term accounts whose rate may come crashing down after the term ends,’ he added.

Research from moneysupermarket.com also shows that providers are not helping the situation either, with average easy access rates falling from 0.74% at the end of 2009 to 0.67% currently and out of the 269 accounts for balances of £1,000, not one pays enough interest to offset the effects of inflation and tax. The best paying account is Halifax’s Web Saver Extra paying 2.8%.

However there is some good news, with the end of the tax year soon approaching, the ISA market has seen several providers increase their rates over the last few weeks in the hope of attracting customers’ hard earned savings, it says.

It highlights Santander’s Flexible ISA at 3.5% and Barclays Golden ISA at 3.10% with both paying more than the best easy access account as well as being tax free. Clydesdale bank and its sister bank Yorkshire have a five year fixed rate ISA paying 5%, while the Principality BS are offering 4.5% on their five year fixed rate cash ISA.

‘There are things you can do to limit the impact on savings. It’s a no-brainer to utilise your tax free ISA allowance this year and next when the amount you can squirrel away in cash increases to £5,100. Although our research shows that four out of ten consumers won’t be utilising their ISA allowance this year, so they are really missing out,’ said Mountford