Basic rate taxpayers need to find a savings account paying interest of more than
5.0% to cancel out inflation and tax.
Banks and building societies offering around 3.5% interest rates before tax are
doing savers no favours while inflation is still raging at 4% or more and tax is
due at 20% on any income earned.
Even this month’s unexpected drop in inflation from 4.4% to 4.0% offers no
improvement, as it just means savers are not losing money so fast, not that they
will make any.
Key to how inflation eats in to savings is which inflation index investors use to
measure performance.
The government has made a big deal of the Consumer Price Index (CPI) as the
best tool for measuring inflation – and that’s where the 0.4% drop to 4.0% comes
from.
For many finance experts, the Retail Price Index (RPI) is the tool of choice. RPI
dropped from 5.5% to 5.3% this month.
The difference comes from what is included in the index to calculate the rate of
inflation – RPI includes housing costs while CPI does not.
The falling CPI rate means basic rate taxpayers need a savings account paying
5.01% to counter inflation, while higher rate taxpayers need one paying 6.67%,
and 50% taxpayers need 8.01%.
A sweep of the savings market by independent financial firm Moneyfacts shows
no instant access accounts match or beat inflation plus basic rate tax and none
beat RPI.
Sylvia Waycot, for Moneyfacts, said: “Whilst a fall in inflation is welcome, it won’t
change the fortunes of the nation’s savers who are still battling against shrinking
spending power and a lack of inflation-beating savings accounts.
“CPI is still double the government’s 2% target, which spells desperate times for
savers who have almost nowhere to place their money to beat inflation.
“Pensioners trying to supplement their income with interest will feel the ensuing
pain the most.”
A saver with £10,000 in an instant access account paying an average return of
0.84% would have seen their buying power drop to £9,653 during the past 12 months.
