Those who would prefer us not to worry about inflation like to point out that in absolute terms today’s inflation rates are tiny. Think back to the 1970s, they say. Then prices rose at double-digit rates – sometimes 20%-plus – for years. But that is to miss the point. For savers, the pain of inflation is not about its absolute levels, but about its relationship to interest rates: if rates aren’t substantially higher than inflation, then those with cash on deposit are likely to be losing money in real terms every day. And that is exactly what is happening now.
A reasonable savings account pays 5.5%. If you are a 40% taxpayer, you net 3.3%. If you consider inflation to be best reflected by the CPI (currently running at 2.8%), that suggests that your average higher-rate payer is making a real return of about 0.5% a year. If you think the RPI (currently 4.5%) is a better indicator, he is losing over 1% a year. Indeed, even a basic-rate taxpayer is not quite breaking even on a rate of 5.5% – to do so, he’d have to be getting just over 5.6%, while a higher-rate payer would have to be at 7.5%. Depressing isn’t it?
More depressing, however, is the fact that if you want to leave your money in a totally risk-free environment, there really isn’t that much you can do about it. While rates will probably rise further over the next year, so, I’m afraid, will inflation (note that the oil price has risen 30% since January alone). And as UK savers know to their constant cost, our retail banks tend to drag their feet when it comes to passing on rate rises to customers via savings accounts anyway.
Risk-free savings: where to stash your cash
So what are the best options in this environment? In The Sunday Telegraph, Niki Chesworth suggests buying into fixed-rate savings bonds – there are several available offering 6% plus. But doing so usually involves locking your money up at a set rate for at least a year, which you won’t be happy with if, in the meantime, inflation and rates rise and you could be earning more elsewhere.
A much better option may be to look at NS&I index-linked bonds. You still have to tie up your money for one, three or five years, but on the plus side, you’re guaranteed to make a real return with absolutely no risk (they’re Government-backed). These come tax free and currently pay a rate 1.35% above the RPI – this means an effective gross rate of 9.75% for higher-rate payers and 7.31% for others, and also means that as inflation rises, your return will rise to compensate. That, says The Guardian’s Patrick Collinson on Headline Money, makes the bonds “fantastic value”. I agree.
Compare UK savings accounts here.
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