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Martin Lewis: Inflation hurts savers
Money-Saving Expert shows how to max your savings
4 March 2011
Many savers feel like they’re being battered against the wall. Not only are interest rates lower than the 200 year prior historic low, but now the ghoul of inflation is eating away at every savers' pile. Yet, finally, a chink of good news.
The new Ghostbusters on the block are a range of inflation-tracking savings accounts that at least guarantee your money won’t be eroded.
Why inflation hurts savers
Inflation measures the rate at which prices rise and prices jumped in recent years. The recently announced January inflation figures showed the highest increase in more than two years. While the official CPI rate is now 4 per cent, the RPI rate, which is far more reflective of the price rises most of us feel, as it includes housing costs, is a whopping 5.1 per cent.
So think of it like this: you put £1,000 in the bank, enough to buy 10 shopping trolleys of goods. If inflation stayed at 5.1 per cent, you’d need £1,051 next year to buy the same 10 full shopping trolleys.
Therefore, unless your saved £1,000 earns 5.1 per cent interest (crucially, after tax), then the amount in your savings account will buy less in a year than it does now. By putting money away, your purchasing power diminishes.
Interest rates are so low right now that even the best easy-access savings only pay about three per cent – and that’s before tax. In other words, pretty much every savings account in the
But don’t go thinking, “What’s the point in saving?” I’m still a big fan of putting money away. The real message here is you must work to maximise the rate on your savings to minimise inflation’s impact.
Inflation-beating savings accounts
The government owned NS&I used to have index-linked savings to track inflation, but that closed to new customers last July. Now three different providers have launched their own versions: the Post Office, Yorkshire Building Society and Birmingham Midshires. Here are a couple of the highlights:
· Post Office Five-Year Inflation Bond
While “stocks” last, if you lock a minimum of £500 away for five years, you will be given the annual RPI rate of inflation plus 1.5 per cent each year. So if the current 5.1 per cent remained the same over the next 12 months, after the first year you’ll have earned 6.6 per cent.
The only chink in the armour is that the interest doesn’t compound, i.e., you don’t get interest on the interest. This takes a smidgeon off your overall earnings, but it’s still a powerhouse deal.
This is a taxed account, so basic rate taxpayers will see 20 per cent of their interest disappear and higher rate taxpayers 40 per cent. The same is true of any normal savings account though.
It’s a while-stocks-last deal, so if you’re going to do it, best to sign up quickly. And do note this is Post Office savings, backed by the Bank of Ireland, not the government-owned NS&I. Yet it's still a fully regulated
· Yorkshire Building Society Cash ISAs
Its Protected Capital Account Inflation Cash ISA pays you the gross RPI inflation over the five years, plus 1.5%. Again you’re supposed to lock the cash away, yet here that’s 1.5 per cent over the total for five years, rather than an extra 1.5 per cent each year. However, it does have a couple of complex terms, so do read them carefully before signing up.
Are inflation-linked savings worth it?
These accounts do what they say on the tin: they track or beat inflation depending on your tax situation, without any risk to your savings.
While that currently looks an amazing offer, with RPI at 5.1%, five years is a long time in the savings market. So while these accounts are super-competitive right now, it doesn’t mean they will be in the long run.
It’s quite possible that inflation will be back in control and interest rates will rise to bring inflation under control, meaning you lose out twice. Interest rates will be higher elsewhere and you’re locked into a lower rate, tied to inflation.
That means I’d think of it more as an “inflation proofer” than a guaranteed high rate of return – still useful for many savers' cash. Inflation eating away at savings is a curse for many, especially older people trying to live off their nest eggs. All others should ensure they are getting the best rates. For a full breakdown of the highest paying instant access and fixed deals go to www.moneysavingexpert.com/topsavings
Housing benefits slashed in April
If you receive housing benefit or plan to claim, massive changes are coming – a million people face average £600 a year cuts. Most changes are unavoidable, so you must plan asap. Full info on how to do all this, who's affected and how to protect yourself at www.moneysavingexpert.com/housingbenefit
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