Jump in inflation punishes savers

June 15th, 2010

With the Consumer Price Index (CPI) rising sharply in April, inflation continues to lessen the real return savers can achieve. It is therefore important that you shop around for the best available interest rate (source: Office for National Statistics).
If you are a basic rate taxpayer, you will currently need to find an account paying 4.6% interest to stop tax and inflation eroding your savings pot.  If you are a 40% higher rate taxpayer you will need to find an account paying 6.2% and if a 50% higher rate taxpayer you will need to achieve 7.4%. The ‘good news’ for basic rate taxpayers is that there are a number of accounts to choose from that pay this level of interest (or more), but the ‘bad news’ for higher rate taxpayers is that there are currently no accounts paying 6% or higher.(source: moneysupermarket.com).
And, despite the ‘good news’ for basic rate taxpayers, according to research conducted by Moneyfacts.co.uk the real rate of return on an average no notice bank account, after basic rate tax and inflation have been taken into account, stands at minus 2.82%.  So in order to achieve the kind of returns required you would have to tie your money in for a set period.
If you decide, you are more inclined to invest your money in a fixed rate bond, to achieve a more competitive rate of return and try to beat tax and inflation you will normally need to commit funds for at least three years. Notwithstanding the fact that you may not want to lock your money away for three years, the dilemma for many savers is that it has been widely predicted that the base rate (currently 0.5%) will rise again in the next couple of years, therefore making shorter-term commitments more appealing.
The competition for deposits, which drove up fixed rates in the second half of last year, has all but faded away.  The number of rate cuts seen on Individual Savings Accounts and the reluctance by the providers offering the best rates to accept transfers in will have disappointed those plumping for tax-free savings.
Unfortunately, the bottom line for prudent savers is that most continue to find it hard to find cash savings that can beat the effects of tax and inflation, with only a few fixed term bonds paying high enough rates to achieve this.

So, despite this ‘doom and gloom’ what can you do to make your money work for you?

One thing for you to consider is whether you can afford to overpay any debts, in considering this option it is important to check that overpayments are permitted and would not attract charges.  As an example, according to moneysupermarket.com in April 2010, making the minimum repayment on a credit card balance of £2,500 can take cardholders up to 25 years to pay off, with an additional interest charge of £3,277.49. However, by making an overpayment of just £10 a month, they can reduce the time taken to pay off the balance by 13 years and 5 months, with an additional saving of £2,019.42 in interest.
The last few months has seen a significant rise in inflation, but with interest rates remaining so low it is becoming increasingly difficult for savers to offset the effects. Given that petrol prices rose to record levels in April, it comes as no surprise that inflation has increased further in the latest announcement.
For basic rate taxpayers, there are accounts out there that can help you to at least breakeven.  Apart from shopping around for the best deal perhaps the most prudent strategy at the moment would be to overpay on any expensive debts each month because overpaying by just small amounts can make a surprisingly big difference to the overall sum owed.