These are confusing times. Look at the inflation numbers. The government’s preferred measure, the Consumer Price Index, tells us that prices are rising at a mere 3% a year. That’s faster than the rates we’ve seen for some time but in absolute terms, it really isn’t that bad.
The problem? All the evidence suggests things are actually rather worse than the official numbers would have us believe. Not only is the Retail Price Index (the one most of us think is more representative of the real cost of living) currently running at 4.2% but also this week saw the release of the worst producer price inflation (PPI) numbers since records began 22 years ago.
The Office for National Statistics says that manufacturers raw material costs rose an amazing 27.9% on an annualised basis in May, while factory gate prices (the prices producers charge retailers) rose 8.9%. This is serious stuff. Right now prices on the high street aren’t rising at anywhere near that rate, but you can’t expect the nation’s retailers to contain all this pain themselves indefinitely. No, at some point they’re going to need us to help them out by paying higher prices too. And that means prices have to rise across the board.
It’s time to save, but there’s a problem
This is horrible news for all of us. The usual effect of inflation is to encourage people to rush out and buy things before they get more expensive, but after years of over-consumption and with house prices falling and unemployment in the private sector rising, who wants to nip out and buy a new flat screen telly today, regardless of how much more it might cost in a year? Not me.
Instead most of us would rather save for the many rainy days ahead. Bad news then that inflation is rarely kind to savers. Use the RPI as a guide to price rises and a lower rate tax payer would have to be getting nearly 5.25% in interest on their money just to be able to buy the same quantity of goods at the end of the year as at the beginning after both inflation and tax are taken into account. A higher rate taxpayer needs to make at least 7%. That’s not so easy: look at the best buy tables and you’ll see that the best accounts pay around 6.3% at the moment.
Saving: why Halifax’s new account isn’t worth the bother
So what is the best thing you can do to maintain your purchasing power? At first glance it looks like the answer is to hotfoot it down to the Halifax, which has just introduced a new account paying a splendid sounding headline rate of 12%. However if you do visit your local branch in the hope of getting this rate paid on all your savings prepare to be disappointed.
You can only deposit a maximum of £500 per month with the advertised rate only guaranteed for the first twelve months, so a total of £6000. And you won’t even get the 12% on this money unless you put another £5000 into one of the Halifax’s nominated accounts (which pay the usual rubbish rates of interest) – and of course you will only earn 12% on the lot for the last month. The upshot is that the maximum pre tax interest you can make on your £6000 is £390 (around £234 after tax for a higher rate payer). What’s more, you cannot withdraw cash during the first twelve months or the rate plummets to the Web Saver rate, currently a little under 4.5%. Hardly seems worth the bother does it?
3 savings accounts you should look at
So what do you do instead? If you are feeling like earning some danger money, you might put some cash into one of the Icelandic bank accounts – Icesave currently offers a limited number of fixed rate one-year bonds paying just over 7% gross for a minimum investment of £1,000. Read our article How to spot the riskiest banks to see why we refer to interest paid on these accounts as ‘danger money’.
Otherwise, if you can afford to lock your savings up away for at least three years, National Savings Certificates offer the RPI plus 0.55% in year one, 0.65% in year two and 0.91% in year three, all tax free. So, in year one a higher rate taxpayer is earning the equivalent of 7.92% gross (RPI at 4.2 + 0.55 = 4.75%. 4.75%/0.6 = 7.92%).
Finally, if you want to keep at least three-monthly access to your money and you have at least £25,000 to save I’d be tempted to look at the Investec High 5 Account. It won’t beat inflation for higher rate tax payers but on the other hand, as it guarantees to pay interest at the average rate of the top five best buy accounts as published by Moneyfacts, you will at least know that your rate won’t be stealth slashed – as they so often are. The current rate on the High 5 account is 6.51% but it changes regularly as the top five rates do. See other high-paying accounts here.
• Merryn Somerset-Webb’s book, Love is Not Enough: The Smart Woman’s Guide to Money, is now out in paperback. Get it from Amazon for a mere £5.39.