With inflation on the rise again, eight out of ten savings accounts are costing you money, according to new research by Moneynet. What should you do?
New figures this week show that Consumer Price Index inflation has jumped from 1.1% in September to 1.5% in October. That’s the first increase in the CPI measure of inflation since February. But with the average savings account paying just 0.98% interest, many savers will find that once their interest has been taxed, they are not keeping up with the cost of living.
Indeed, to beat inflation, a basic-rate taxpayer needs to earn at least 1.875% interest while a higher-rate taxpayer needs to earn 2.5% or more, says Becky Barrow in the Daily Mail. However, 91% of savings accounts pay less than 2.5%. So check your rate as there are plenty of ways to boost it.
First off, minimise the tax you pay on savings by using up your Isa allowance – you can save up to £3,600 a year (rising to £5,100 from 6 April 2010) with the interest paid tax-free. And if you are a higher-rate taxpayer, consider putting your savings in your spouse’s name if they are in a lower tax bracket.
Next, think about locking away your savings. If you are prepared to fix your savings for two years, Birmingham Midshires pays 4.25% on its Internet 2-Year Fixed-Rate Bond.
However, “you should keep a ‘rainy day’ fund in an instant access account for emergencies”, says The Daily Telegraph. And don’t lock your money up for too long – if interest rates rise you could miss out.
If you can’t risk tying up your money then opt for an internet savings account. Online accounts are cheaper to run than postal, branch or telephone accounts so banks often offer savers better rates. For example Saffron Building Society pays 2.85% on its instant-access Online Goal Saver. That’s not great for a higher-rate taxpayer but you can improve the rate by agreeing to give notice before you access your money.
If you can give three month’s notice and have at least £25,000 to deposit, Investec’s High 5 account is especially tempting. The account pays 3.36% AER interest. And because the rate is based on an average of the top five gross rates published by Moneyfacts, if a different bank bumps up its interest rate you’ll still benefit.
Finally, watch out for short-term introductory bonus rates. These can lift banks to the top of the best-buy tables but often end after a short period. So the advice is to shop around. With banks and building societies chasing cash to shore up their balance sheets, it’s worth the effort.