Savers lose out as inflation creeps up to 2.7%
The price of goods rose once again in May 2013 as inflation increased from 2.4% to 2.7%, piling more pressure on cash-strapped savers and pensioners.
The rise in the consumer prices index means that those who rely on their savings for an income will have even fewer accounts that match or beat inflation.
The main reason for rising inflation in May was an increase in fuel and petrol prices, according to the Office for National Statistics, while an increase in the price of clothing also contributed.
It takes inflation back to the levels seen between October 2012 and March 2013.
Howard Archer, chief economist at HIS Global Insight, said consumers are the losers as rising prices puts the squeeze on everyone's household budgets. He said: "The squeeze on consumer purchasing power remains appreciable given that inflation is running at essentially double underlying annual average earnings growth of 1.3% in April 2013."
But savings experts warned that pensioners and anyone else relying on an income from their cash investments are the biggest losers.
Andrew Hagger of Moneycomms.co.uk said that we're now back to the situation where no savings accounts beat inflation. "It's yet another set of depressing inflation figures for savers," he added.
"With CPI at 2.7% a basic rate taxpayer needs to earn 3.375% before tax and a higher-rate 40% taxpayer needs to generate 4.50% to stop their savings being eroded by inflation."
There is now just one savings account that taxpayers can access, which will match or beat inflation. This is an easy access cash ISA with First Direct on a balance of £40,000. "Not only do you need to have built up a large ISA balance which can be transferred, but you must also have a First Direct 1st Current Account to qualify," explains Anna Bowes of Savingschampion.co.uk.
Non-taxpayer have a few more options, but only if they are prepared to tie their money up. First Save has a 5 year Fixed Rate Bond paying 2.90% gross/AER. ICICI, Union Bank UK and Shawbrook Bank are all offering 2.75% gross/AER, fixed for 5 years.
First Direct, M&S and HSBC also have Regular Saver Account available for qualifying customers, paying 6% gross fixed for 12 months. But the interest earned does not equate to 6% on the whole amount saved over the course of the year as only the first premium is invested for the 12 months.
The best fixed rate ISA, which is open to anyone, is offering just 2.50% - fixed until 31/5/16. "But if you have a current account with Smile, you could open a 2 year Fixed Rate ISA which is paying slightly more at 2.60% gross/AER (fixed until 5/4/2015)," adds Bowes.
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).
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.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.