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Basic rate taxpayer now needs a savings account paying 5.63% to beat inflation and tax, says ONS
Rising inflation means there are now just a handful of accounts that will prevent savers' capital being eroded by the increasing cost of living.
The Office for National Statistics said the cost of living, as measured by CPI, rose from 4.4% in July to 4.5% in August, meaning a basic rate taxpayer now needs to find a savings account paying 5.63% a year to beat inflation and tax, while a higher rate taxpayer needs to find an account paying at least 7.5%.
The effect of inflation on savings means that £10,000 invested five years ago, allowing for interest and tax at 20%, would have the spending power of just £9,345 today.
Moneyfacts said there were just five accounts that negated the effects of tax and inflation for basic-rate taxpayers, all of which were fixed-rate Isas. These are offered by the Yorkshire, Barnsley and Principality building societies and the Yorkshire and Clydesdale Bank.
Sylvia Waycot of Moneyfacts said: "Inflation continues to whittle away any hope of a decent return on the nation's savings. Without any hope of respite, all savers can do is sing the blues as they watch their spending power disappear down the Swanee.
"Over the last year the number of savings accounts that beat inflation for basic rate taxpayers has dropped successively from 91 to a measly five today. Cash Isas limit the amount of investment and therefore return, which is yet a further hindrance when trying to make ends meet."
One of the few lifelines for savers was NS&I's index-linked savings certificates, which paid interest equal to the RPI measure of inflation, which increased to 5.2% from 5% in August, plus an average of 0.5% over their five-year life, but these were withdrawn in early September.
Options for savers trying to protect their money from inflation include the Post Office's three-year inflation-linked bond (paying RPI plus 0.5%), which closes to new investors on 16 September, and Yorkshire building society's inflation-linked Protected Capital account.
According to financial research company Defaqto, offset mortgages remain a good bet for savers looking for a decent return on their savings. Its banking analyst David Black said: "If someone has a mortgage and a reasonable level of savings, the beauty of an offset mortgage is that they will earn interest on their savings at the same rate that they pay on the mortgage.
"As the interest earned on the savings is offset against that payable on the mortgage, they don't actually receive it – but as a result it is effectively tax-free. If someone is financially disciplined, using an offset could mean they are able to pay off their mortgage more quickly."
Black highlights two-year tracker offsets from Accord Mortgages and Yorkshire building society, as well as fixed-rate offsets from Yorkshire BS.
Tom McPhail, head of pensions research at Hargreaves Lansdown, warned that consumers saving for retirement should not ignore the inflation risk. For a 65-year-old man with a pension pot of £100,000, the current best terms for a single life annuity with a five-year guarantee are £6,066 on a level annuity, or £3,723 with an RPI-linked product.
"This means that based on a life expectancy of 21.6 years, he would be better off buying the RPI-linked annuity only if inflation runs at 4.6% or higher year-on-year for the rest of his life," McPhail explained.
"Investors should look to build some inflation proofing into their retirement income. There is nothing to stop investors splitting their pension fund, buying some level income and some increasing income. Whatever else they do, they should shop around to make sure they are getting the best possible deal with the money they have built up in their pension."
But there could be light at the end of the tunnel for savers. Experts are highlighting the fact that inflation will fall early next year when the January 2011 rise in VAT falls out of inflation calculations.
Howard Archer of IHS Global Insight said: "Consumer price inflation will hopefully start retreating late this year and then fall back markedly in 2012 as the upward impact from past VAT developments, earlier jumps in energy, commodity and food prices, and sterling's past sharp depreciation wanes."
- Savings rates
- Savings
- Retirement planning
- Family finances
- Banks and building societies
- Consumer affairs
- Inflation
- Economics
Mark King
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