Struggling savers face tough times

Published on Tuesday 15 February 2011 18:00

The latest increase in inflation is further bad news for savers, who were already struggling to find returns that stopped the value of their deposits falling in real terms.

The rise in the Consumer Price Index to 4 per cent in January from 3.7 per cent in December means a basic-rate taxpayer now needs to find an account paying at least 5 per cent just to stop the value of their savings eroding in value.

Higher-rate taxpayers face an even bigger challenge, as they must find an account offering interest of 6.67 per cent to prevent the value of their savings falling, once tax and inflation are taken into account.

Financial information group Moneyfacts.co.uk said there were only 23 accounts available with returns of the level basic-rate taxpayers needed and just 21 that would enable higher-rate taxpayers to make a real return on their money.

All but two of these accounts are fixed-rate bonds, under which savers have to lock up their money for four or five years, all of which are also ISAs.

Savers using their tax-free allowance need to make returns of only 4 per cent to beat inflation, because no income tax is charged on interest paid on ISAs.

But people can only invest up to 5,100 in an ISA during the current tax year, leaving savers struggling to find a home for the rest of their cash.