Events | 2010.08.17
Inflation dips but low credit interest continues to erode savings
Savers under pressure as consumer price index remains over 3% and low returns from current accounts continue
Inflation fell marginally in July, but savers are still struggling to find savings accounts that will protect their money from being eroded, leading to warnings that life for families will "get worse before it gets better".
Figures released today by the Office for National Statistics show the consumer price index (CPI) has fallen to 3.1%, a fall of 0.1% from June\'s 3.2%, but remains well above the government\'s 2% target.
To prevent their savings from being eaten away by the effects of inflation, basic-rate taxpayers now need to find an account paying 3.88%, while a higher-rate taxpayer needs to find an account offering 5.17%. But the savings interest rates offered by most banks and building societies are so low, the average savings pot of a basicrate taxpayer is in effect being eroded by 2.51% per year, according to product comparison website Moneyfacts .
The website said there are no instant access or notice savings (variable rate) accounts that beat inflation and basic tax. There are, however, 87 fixed-rate accounts or bonds that will help a basic-rate taxpayer to break even – but many require savers to take out (or already hold) a riskier longer-term investment product from the same provider.
The best-paying fixed-rate accounts are the HiSave five-year bond on offer from ICICI Bank UK , paying 4.75%; and Aldermore\'s five-year bond that matches it. Barnsley building society offers a four-year online bond paying 4.25%. But no one-year or two-year fixed rate beats 3.88%.
Andrew Hagger of Moneynet.co.uk highlights an account that launched yesterday: State Bank of India\'s flexible five-year bond which pays a stepped rate of interest, increasing each year. In year one savers receive a rate of 3.25%, rising to 4% in the second year; in year three they get 4.5%, increasing to 5% in year four. In the fifth year they receive 5.75%. "The great thing is that after you\'ve had your money in for two years, you can make withdrawals without incurring any penalties or loss of interest," said Hagger.
If you do commit most of your nest egg to a five-year deal, you have to be aware that interest rates may not stay at a low for the long term: a rate that looks promising now may look much less attractive if rates start to increase.
There are no accounts available that will help a higher-rate taxpayer beat the effects of inflation and tax.
Savers hardest hit by the rise in inflation are those who rely on their savings to supplement their income, many of whom are pensioners. Ann Robinson, director of consumer policy at uSwitch.com , said despite the marginal fall in inflation, the pressure on families is tighter than ever. "Today\'s drop will provide no relief to the millions of households struggling to stay afloat. For those that spend a high proportion of their income on food, life is getting very tough. Luxuries have been the first to go, but the current climate is forcing 24% of people to also cut back on food. This could get worse before it gets better."
With an estimated 16 million people experiencing a pay freeze this year and nearly one in five of us already funding living costs with debt, Robinson warned short-term debt solutions are not the answer. She said: "Rather than continuing to plug the hole by borrowing, I would urge people to strip down their living costs and household bills to the bare minimum."
Hopes of any longer-term reductions in inflation may be stunted by the VAT increase early next year and speculation that petrol prices are soon to spiral. Idustry experts claim the only trigger for an improvement in savings rates would be a surprise increase in the base rate by the Bank of England, but this is unlikely to happen soon.
Darren Cook, a spokesman for Moneyfacts.co.uk, added: "Savers may have had a short respite from a marginal fall in inflation, but savings rates have hit a plateau and may be there for a while."
For more information, please visit
http://www.guardian.co.uk/money/2010/aug/17/inflation-cpi-savings-interest
