Inflation makes it really tough for savers

News - Savings

Written by Ray Clancy

Wednesday, 17 February 2010 09:11

The latest annual inflation figures of 3.7% for the Retail Prices Index and 3.5% for the Consumer Prices Index mean that both basic and higher rate taxpayers face a near impossible struggle to get a real rate of return on taxable savings accounts, it is claimed.

Experts point out that the figures published yesterday mean that savers need to be incredibly pro-active and search for the best deals.

‘The stark reality is that there are now no taxable instant access or notice accounts that will give a real rate of return to even a basic rate taxpayer let alone a higher rate taxpayer. The average instant access account pays 0.86% gross which equates to a paltry 0.69% for a basic rate taxpayer and only 0.52% for a higher rate taxpayer,’ said David Black, Banking Specialist at Defaqto.

‘Apart from some Cash ISAs, the only bank and building society savings accounts that give the higher rate taxpayer any chance of a real rate of return are a handful of regular savings and current accounts as well as a few fixed rate bonds that require linked investments in the stock market. The total number of such accounts barely reaches double figures and many of them have conditional additional requirements,’ he revealed.

‘Those reliant on savings interest to supplement inadequate income will be devastated by this double whammy of rising inflation and low interest rates,’ he added.

Basic rate tax payers will now need an account paying at least 4.62% to gain benefit in real terms from their savings, increasing to 6.17% for higher rate tax payers, according to research by experts at moneysupermarket.com.

‘The latest inflation news is a bitter blow for savers. 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. Yes, it’s getting harder to earn a positive return on your savings, but rather than sitting back and doing nothing, it is more important than ever for savers to proactively seek the best returns possible on their money,’ said Kevin Mountford, head of banking at moneysupermarket.com.

‘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. 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,’ he added.

Darren Cook of Moneyfacts.co.uk said that each month inflation is cutting deeper into people’s spending power. ‘Those who are relying on their savings pot to subsidise other income are seeing their savings being eroded on average by 2.92% per year for a basic rate taxpayer and 3.06% for a higher rate taxpayer,’ he said.