Savers benefit from a drop in inflation

July 18, 2012

Nevertheless, for the first time since November 2009, you can find easy access accounts that beat the effects of inflation. Savers have benefited as a drop in CPI inflation to 2.4 per cent from 2.8 per cent means 11 easy access savings accounts now beat inflation, according to MoneySupermarket.com.

To beat CPI inflation at 2.4 per cent, basic-rate taxpayers will need an account paying at least 3 per cent to gain benefit in real terms from their savings, increasing to 4 per cent for higher-rate taxpayers, and 4.8 per cent for 50 per cent taxpayers. According to Moneyfacts.co.uk, the impact of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20 per cent, would have the spending power of just £9,232 today.

For basic-rate taxpayers there are now 11 easy access accounts, eight cash Isas, 192 fixed rate bonds and 76 fixed rate Isas that beat the eroding effect of inflation. For higher-rate taxpayers, no easy access accounts beat inflation and only 11 fixed rate bonds and seven fixed rate Isas beat inflation. Lloyds TSB, Bank of Scotland and Santander all offer current accounts paying 3 per cent interest.

Kevin Mountford, head of banking at MoneySupermarket.com, says: "It is vitally important savers check their rates and be prepared to switch if they are not on the most competitive deal. The difference between the average and top-paying rates can be significant, so moving to a better deal can go a long way to help savers limit the impact on their pots."

This is particularly important for elderly savers who face much higher levels of inflation than the general population. According to figures from the Alliance Trust Economic Research Centre, it is the over 75-year-old households that continue to face the highest rate of inflation, as has been the case since the end of last year. Their inflation rate fell from 3.4 per cent to 2.9 per cent in June and, although this is the lowest level since November 2009, it is still higher than any other age group.

The over 75 age group continues to feel the effects of higher gas and electricity price inflation more than any other age group, because it allocates a significantly larger proportion of its budget to spending on such utilities. Both gas and electricity price inflation were unchanged in June, remaining elevated at 15 per cent and 8 per cent respectively. However, the over 75s did benefit from a fall in food price inflation, from 3 per cent to 2 per cent in June, as they allocate the largest proportion of their budgets, almost 17 per cent, to food. In June, for example, fish price inflation fell from 5 per cent to zero and oil and fat prices fell almost 1 per cent from a year ago.

Sylvia Waycot, spokesperson for Moneyfacts.co.uk, says: "Many people look to their savings to supplement their income when they retire. Monthly paying interest accounts usually offer a lower return than their annual interest equivalents, which puts those relying on these accounts at an immediate disadvantage and that is before you knock off inflation and the taxman's cut.

Those prudently saving for 'a rainy day' will find they are still taking one step forward and one step back as their good intentions are dwindled by inflation."

11 Easy access accounts that beat inflation

Account	Interest rate
Coventry BS Telephone Saver	3.25%
The Nottingham First Home Saver	3.25%
ING Direct EA Savings	3.24%
West Brom BS Direct Bonus acc	3.22%
Santander e-saver issue 5	3.20%
Kent Reliance Direct Savings acc	3.20%
Kent Reliance High Balance EA	3.10%
The AA Internet Extra	3.07%
Derbyshire Netsaver Issue 3	3.06%
Nationwide Mysave Online Plus	3.06%
GE Bonus Saver Issue 2	3.06%