CPI rise in UK makes it harder for higher rate tax payers to find inflation busting savings

News - Savings

Written by Ray Clancy

Wednesday, 15 December 2010 16:13

The latest rise in inflation in the UK means that to maintain the purchasing power of their savings a basic rate tax payer needs to find a savings account paying 4.13% per annum, while a higher rate tax payer at 40% needs to find an account paying 5.5%.

With the Consumer Price Index up to 3.3% basic rate tax payers have a choice of 57 accounts, allowing for tax, that negate the impact of inflation, while only 44 accounts are available to 40% band tax payers.

Research from Moneyfacts also shows that many of the accounts, some 42, that negate inflation are ISAs, leaving 17 non ISA accounts available to basic rate tax payers and just two to higher rate tax payers.

Savers hardest hit by the rise in inflation are those who rely on their savings to supplement their income, many of whom are pensioners. The average savings interest rate payable to a basic rate tax payer is in effect being eroded by 2.47% per year.

‘Inflation continues to antagonise prudent savers who are already struggling to achieve a competitive return on their money. Those who rely on their savings to supplement their income have been hardest hit, many of whom are pensioners,’ said Victoria Mayo, spokesperson for Moneyfacts.

‘Basic rate tax payers need to earn 4.13% just to maintain the purchasing power of their savings, while higher rate tax payers at 40% need to earn 5.5%, a level that is only available on a handful of products,’ she explained.

‘Generally cash ISAs and longer term fixed rate bonds tend to offer the best rates for savers trying to beat inflation. However, savers who think the base rate will go up may be unprepared to commit their funds.

‘Savings rates in the last six months have been slowly rising, with easy access rates at the highest level since June 2010, but no where near enough to combat the effects of inflation. Bearing in mind the number of inflation beating accounts available, savers will really have to do their homework to find a competitive rate,’ she added.