High inflation cripples savings
There are still no savings account that beat inflation despite the rate falling in November.
Inflation fell for the second month in a row in November, but it is still running at more than twice the Bank of England's 2% target rate.
The consumer prices index (CPI) rate of inflation fell to 4.8% (from 5%) while the retail prices index (RPI), which includes mortgage payments and council tax, fell 0.2% to 5.2%.
To beat inflation, a basic-rate taxpayer paying 20% now needs to find a savings account paying at least 6%, while a higher-rate taxpayer at 40% needs to find an account paying an impossible 8%.
Unsurprisingly, there are now no regular accounts on the market to beat this – down from 57 a year ago - and £10,000 invested five years ago would now only be worth £9,210.
The only options left for savers wishing to beat rising prices are three inflation-linked accounts, which are all structured savings bonds.
Sylvia Waycot, spokesperson for moneyfacts.co.uk, says: "With returns so low and inflation unsteady, people don't know which way to turn.
"This means more and more people are falling into "the eroding spending power trap" which has already wiped nearly £800 off the spending power of £10,000 in just five years."
The three inflation-beating bonds
|Legal & General||Inflation Protected Deposit Bond 1||A minimum return of 17.5% (3.27% AER) or, if greater, 100% of the growth in the Retail Prices Index (RPI), plus the original investment returned||27.01.17||£500|
|Santander||Inflation-Linked Bond Issue 8||105% of the growth in the Retail Prices Index (RPI), or a guaranteed minimum return of 18%, plus the original investment returned||01.01.17||£500|
|Yorkshire BS||Protected Capital Account – Inflation-Linked 10||100% of the growth in the Retail Prices Index (RPI), plus original investment returned||01.02.18||£3,000|
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.