It is a terrible time to be a saver. Inflation continues to rise yet interest rates remain low. According to the Consumer Price Index, inflation hit 4% in January as a result of soaring commodity prices and the increase in VAT. As a result anyone with money in an instant-access or short-term fixed-rate savings account is losing money. A basic-rate taxpayer now needs an account paying at least 5% gross (pre-tax) interest to see any real growth in their savings. A 40% taxpayer needs to earn an impossible 6.67% gross.
At present, if a basic-rate taxpayer had £10,000 in the average instant access savings account, paying 0.67% interest, they would earn £53.60 a year net. But factor in inflation and they’re also effectively losing £400 a year as the purchasing power of their money declines. Even after interest they are £346.40 worse off a year. A higher-rate payer would be £359.80 worse off with the same account, according to Moneynet.
So how can you minimise the damage? First of all, make the most of your individual savings account (Isa) allowance. You don’t pay any tax on interest earned in an Isa. Sadly, you will still probably lose money in real terms, only more slowly. The best instant-access Isa at present is Nationwide’s e-Isa, which pays 2.90%. However, you need to have a card account with Nationwide first to open the account.
The next best bet is West Bromwich Building Society’s WebSave Isa, which pays 2.88%. The only way to actually beat inflation with an Isa is by locking your money up for four years. You can get a rate of 4.25% tax-free with Halifax or the Bank of Scotland. The problem there, though, is that when interest rates rise, as they are widely expected to start doing soon, your interest rate could end up being uncompetitive before the four years are up.
If you have some money you’re waiting to move into an Isa, your best bet is to wait a little longer. The best Isa rates are already 11% higher than last year, but many of the big players have yet to launch their new accounts designed to entice savers before the tax deadline at the start of April. “The average cash Isa rate peaks in the week before the end of the tax year,” according to analysis by Moneysupermarket for The Sunday Times. So wait until the first week of April and then secure the best one-year deal. That way you’ll minimise your inflation losses, but also be free to move your money next year when interest rates will hopefully have improved. And don’t forget that from 6 April you’ll have a new cash Isa allowance of £5,340 – the best one-year account will be a good bet.