Good news for savers as inflation falls
Britain's beleaguered savers and pensioners were today handed a lifeline with the news that inflation fell from 2.8% to 2.4% in April 2013, thanks mainly to lower petrol prices and lower air fares.
The drop in consumer price inflation means that basic-rate taxpayers now need to find a savings account paying 3% gross in order to match or beat inflation; while higher rate taxpayers need to find an account paying at least 4% gross.
Jamie Perkins, partner at adviser Westminster Wealth Management, said: "Beleaguered savers and pensioners will be glad of the respite, but many British households continue to feel the pinch. Even with the drop in inflation, prices are still rising six times as fast as average wages."
Moreover, there remain few savings accounts that will stop savers' cash from being eroded by the cost of living.
"The current best-buy tables make for depressing reading," says Andrew Hagger of Moneycomms. He says the best one-year fixed-rate bond – offered by Principality Building Society or Saffron Building Society – pays just 2%. Even if you fix for five years, the best deal is just 3% with Virgin Money.
Moneywise.co.uk/compare also identifies Dudley Building Society's 1 Year Easy Saver as a best buy, paying 3% gross. Some accounts aimed at first-time buyers saving for a property deposit also pay 3%, though they are not open to everyone.
"If you haven't used your ISA allowance, take a look at Cheshire Building Society's 2.3% tax-free rate or NS&I's Cash ISA paying 2.25%," Hagger suggests.
Instant-access savings accounts are, of course, even poorer. You can get 1.7% with Derbyshire Building Society, 1.65% with Triodos Bank and 1.5% with the Post Office.
Hagger says some people prepared to take on more risk might look to the peer-to-peer lending market to find a better rate. "For example, Ratesetter is offering 3.7% on a one-year fix, but there is no Financial Services Compensation Scheme guarantee."
RateSetter, like Zopa, does offer protection via its own provision fund, but this is not a 100% cast-iron guarantee, so many savers will not be prepared to take the risk.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
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).
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.