Options running out for savers as inflation hits 14-month high
Although inflation did not hit the 3% that was widely anticipated – thanks in part to falling European airfares – that fact will do little to appease savers struggling to keep apace with inflation, let alone beat it.
According to Patrick Connolly, an independent financial adviser at Chase De Vere, a basic-rate taxpayer now needs a savings account paying in excess of 3.625% gross to outstrip inflation, while a higher-rate taxpayer would need an account paying north of 4.833%.
Savers in cash ISAs – who do not pay any tax on their interest - need accounts paying 2.9% plus to see any real growth.
But according to Andrew Hagger, personal finance commentator at Moneycomms, there are currently no mass-market instant access or fixed-rate accounts that meet this criteria. "Even the new seven-year fixed-rate bond from Skipton Building Society only pays 3.5%," he says.
From the entire universe of savings accounts, Hagger says there are only five that beat inflation and all of them have limitations that will prevent the majority of savers from accessing them.
Building societies West Bromwich and Kent Reliance both have regular savings accounts, paying 4% and 4.1% respectively, but they require you to pay in a respective £250 or £500 a month. First Direct also has a regular saver account paying 6%, as does HSBC, paying 4% and 6% but all of these are open to current account holders only.
In the ISA market, First Direct is topping the tables with an account paying 3% tax-free but this is only available on balances over £40,000.
Making matters worse, Connolly says that savers also need to consider their own rate of inflation might be higher than the official figure.
"A personal rate of inflation looks at the expenditure related to an individual and it is usually the case that older people will spend a higher proportion of their money on items such as food and utilities, which tend to rise faster than inflation. The double-whammy for older investors is that they are the people who are most often reliant on their savings," he explains.
This is increasingly forcing savers into making some tough decisions, as Connolly explains: "The ongoing dilemma for savers therefore is whether to accept that the spending power of their money is continuing to fall or take more risk in the hope of generating better returns."
Those who are very cautious, or who cannot afford to tie up their money for five years or more should stick with cash – chasing the best interest rates and making the most of their £5,760 ISA allowance to ensure they don't pay any unnecessary tax on their interest.
Other investors however can look to alternative methods of generating income or growth. Connolly says: "The best strategy is usually to invest into a range of different asset classes such as shares, fixed interest and property, in proportions depending upon the circumstances, requirements and attitude to risk."
He adds: "This approach can provide investors with a good degree of diversification and the growth potential to beat inflation over the medium to long term. However, there is also the risk that they could lose money in both real and absolute terms."
Alternatively, those that are happy to take an increased risk, but don't want to invest in the stock market can investigate the opportunities posed by peer-to-peer lending. Hagger says: "There's no protection from the Financial Services Compensation Scheme, but the providers have their own safety nets in place. RateSetter for example operates a provision fund to protect lenders (savers) and so far nobody has lost a penny."
Current rates available for savers on Ratesetter range from 3.2% fixed for one year to 5.1% for five years.
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.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
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).
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.
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.
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).