Will your savings beat inflation?

Published by Sylvia Morris on 29 October 2010.
Last updated on 01 November 2010

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%.

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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.



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