Record inflation increases could hurt savings

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By Mark Mitchell
Know Your Money Editor

The Bank of England recently announced the biggest increase in inflation since records began and it may come as bad news for savers with only a limited number of savings products now paying high enough interest to beat the impact of this rise.

Therefore, now could be the right time for consumers to shop around to find the right savings account for them. A consistently high rate of interest could mean that the effects of inflation are minimised for savers.

The importance of interest

Basic rate tax payers will now require an account paying at least 3.63% to gain benefit in real terms from their savings, increasing to 4.84% for higher rate tax payers, research by experts at moneysupermarket.com suggests.

However, it may prove to be something of a challenge for consumers to find these deals on offer.

People with easy access savings accounts could be set for disappointment as the combined effects of inflation and tax take hold.

The consumer site found that none of the 261 accounts of this sort pays enough interest to beat the negative factors.

Regular savers only fare slightly better, with 14 of the 42 regular savings accounts paying interest higher than 3.63% for basic rate tax payers but higher rate tax payers, have little choice with only two accounts paying higher than 4.84 per cent.

What do the experts say?

Kevin Mountford, head of banking at moneysupermarket.com, said: "The inflation announcement is a real blow to savers who are finding it extremely hard to find a suitable place for their hard-earned cash. When looking to choose a suitable savings product it is easy to forget the impact inflation can have, so it's vital savers keep a close eye on how their account stacks up.

"Given the low number of products which offer a return above inflation, savers really need to keep a close eye on the interest rate, especially on fixed-term accounts whose rate may come crashing down after the term ends. There are things you can do to limit the impact on savings. It's a no-brainer to utilise your tax free ISA allowance this year and next when the amount you can squirrel away in cash increases to £5,100.

He added that better news could be on the horizon for savers as the latest revelations will mean that banks and building societies will have to react accordingly and this could see savings rates increase in the near future.

"[The] record increase should mean a rise in base rates this year becomes much more likely which will be better news for savers," he stated.

What are some of the options?

The best paying easy access account may be the Coventry Building Society First Class Postal account paying 3.3%.

Only two regular savings accounts pay higher than 4.84% - one at Norwich and Peterborough and the other at Chorley and District.

"During this low base rate environment, it seems that many banks and building societies are using short term bonuses in a bid to attract saving deposits. While it shows that there are some decent rates around, savers should be aware of the size and length of these offers and be prepared to switch to accounts paying consistently attractive rates of interest over the longer term," suggests Linda McBain, head of Banking at Investec Private Bank.

Savers who lack the time to keep changing accounts but want to avoid being stung by a low rate may want to opt for the Investec High 5 Account which takes the five highest savings rates in the market and pays the average of these top five rates. It is currently paying 3.32 per cent.

Important Notice
This guide is intended for general information only and is not intended as, and does not constitute, any form of advice, recommendation or endorsement by us of any particular product(s) or services and you should rely on your own further research and professional advice in relation to your specific requirements and circumstances before purchasing any products or services. Use of this guide is subject to the Terms of Use of the KnowYourMoney site.