Will your savings beat inflation?
Savers have been told not to expect to live off the income from their savings.
Bank of England deputy governor Charles Bean said they should eat into their reserve cash and encouraged spending over saving. But with inflation running at 4.6%, as measured by the Retail Prices Index (RPI), savers are already doing that.
At this level, even non-taxpayer income is failing to keep up with inflation. Basic-rate taxpayers need an impossible 5.75% before tax for deposits to maintain their value, 40% payers need 7.66% and 50% payers need 9.2%.
They have already been abandoned by National Savings & Investments (NS&I), which withdrew index-linked savings certificates in July.
Jane Platt, chief executive of NS&I, said the decision was temporary, but still there are no plans to reintroduce them. And some savers fear any new version will be linked to the lower Consumer Price Index, rather than the RPI.
National Counties Building Society has launched a second issue of its Index account, which pays the RPI inflation rate plus 50% for five years. The return is taxable, but basic-rate taxpayers still come out ahead of the rise in the cost of living.
The impact of low rates has still to be felt by some savers. HSBC estimates that £110 billion in 5.5 million fixed-rate bonds will mature this year.
Two years ago, savers could expect to earn 7% if they tied their money up for 24 months. That has now halved to 3.5%. And banks have been cutting fixed-rate deals, even though the base rate has remained unchanged at 0.5% since March 2009.
In April last year, the best one-year deal was 3.4% (2.72% after tax) with Halifax. Now it's down to around 3% (2.4%). And two-year deals have fallen from 4.2% (3.36%) to 3.55% (2.84%).
The one-year fixed-rate deal offers little more than a top easy access account: NatWest is paying 2.85% (2.28%) on its e-Savings account to new savers, including a bonus for the first year.
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.
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.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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).