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Beat Inflation By Increasing Your Real Rate of Return on UK Savings Accounts

Personal_Finance / Savings Accounts Apr 21, 2007 - 08:32 PM GMT

By: Shahla_Walayat

Personal_Finance

Inflation as measured by the Retail Price Index (RPI) hit 4.8% this week. Which means that many savings accounts on the market are failing to keep pace with inflation and the value of your hard earned savings is falling.

Some of the most popular accounts such as Halifax Websaver at 5% and Cahoot Saving Account at 5.25% are paying basic rate tax payers a net return of just 4% and 4.2%. Which is less than the rate of inflation. Even at the top of the market range accounts such as ICICI Savings account at 5.65% fails to deliver a return in real terms, coming in at a net 4.52%.


The effect of this failure of UK savings accounts to keep pace with inflation means that your savings are losing value in real-terms. Where even a top rate account will lose you 0.25% in real-terms. let alone the bottom end of the market with poor rates of less than 3%.

How to beat inflation ?

The key here is to take advantage of tax free savings accounts and instruments such as -

The Cash ISA, of which the best paying is Barclays. Despite persistent problems with poor customer service in opening the account with Barclays as reported by people experiencing attempts at opening an account or the that Barclays in a recent survey by fool.co.uk came top as the least trusted bank in Britain. Still it may be worth the extra effort in persisting in opening an account with Barclays given the 1.7% premium over the rate of inflation. This account does include a 1% bonus for 12 months so after a year, savers should contemplate moving their cash isa to a better interest rate. The maximum investment is £3000 per Tax year (rising to £4000 in April 2008).

Index Linked National Savings Certificates - These are guaranteed to beat the rate of inflation as measured by RPI, by paying approx 1% plus RPI on the amount invested (depending on the bond term). And as with the Cash ISA, the return is free of UK income tax. Therefore a must have savings product to beat inflation especially for higher rate tax payers where the equivalent return before tax is 9.9% ! The maximum investment is £15,000 per issue.

Don't delay in making the switch from taxable savings accounts to tax free savings and investments, as every day you delay, your hard earned savings are losing their value in real terms !

By Shahla Walayat

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