Inflation bad news for savers but good for property investors

News - Tax

Written by Ray Clancy

Wednesday, 17 November 2010 11:27

An increase in inflation in the UK means that higher rate taxpayers will need to find a savings account of at least 5.33% and lower tax payers one at 4% to maintain the purchasing power of their savings.

With the Consumer Price Index rising to 3.2% basic rate tax payers have a choice of 31 accounts allowing for tax, that negate the impact of inflation, while only two accounts are available to 40% band tax payers, according to Moneyfacts.

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 interest payable to a basic rate tax payer is in effect being eroded by 2.57% per year, it claims.

‘That stealthy enemy called inflation is quietly but aggressively eroding away the spending power of a saver’s hard earned nest egg. The average instant access savings rate is still at rock bottom at a rate of only 0.79%. The only trigger for any improvement in savings rates may be a surprise increase in the Bank of England’s base rate but this is not likely to happen soon despite the increase in the rate of inflation,’ said Darren Cook, spokesperson for Moneyfacts.

‘To just break even, higher rate tax payers need to find an account paying 5.33%, a level that is nigh on impossible to achieve. It is difficult for savers, at best they should try to stay within an arms length of inflation and try to weather the storm of low rates and high inflation,’ he explained.

‘It is likely that the New Year may bring further bad news for savers as the increase in VAT is likely to add to the inflationary headache,’ he added.

New research from the Worldwide Property Group reveals that there is a 50/50 split regarding the potential direction of UK interest rates. Results from the company’s October confidence tracker survey show that respondents are equally split, with half expecting interest rates to rise over the coming 12 months and half expecting rates to remain unchanged during this time. Not one person indicated that they expected rates to fall further.

The expectation of a rate rise has reduced from a high of 79% in April, thereby adding further fuel to the growing belief that interest rates are set to remain at historically low levels for the foreseeable future.

Some 65% of the people who completed the survey also said that they are continuing to benefit from low interest rates. And 67%, considerably higher than the 12 month average of 57%, indicated that the current low level has actually increased their desire to buy property.

The research also shows that confidence in property remains high with 83% of the opinion that today represents a good time to buy UK property. This is only slightly down on last month’s record of 86%.

On the subject of overseas property, 58% of those surveyed are currently considering an overseas purchase, with the United States, Caribbean, Spain and Brazil leading the table of most desired locations. Portugal, France and Italy also ranked highly.

Property still continues to be the preferred investment route amongst survey respondents with a huge 75% saying that in their opinion this currently offers the best investment potential.

‘It is clear to see that low interest rates are continuing to benefit many people and as such it is encouraging to see that general opinion appears to be moving in the direction of these remaining low for quite some time,’ said , Kevin Wilkes, managing director of the Worldwide Property Group.

‘Property in the UK and in many overseas locations currently offers some exceptional opportunities, and an increasing number of people are taking advantage of this whether for investment, lifestyle or residential purposes,’ he added.