It's the end for savings

MILLIONS of savers are seeing their accounts rendered obsolete because of low interest rates and rising inflation.

Millions will lose out as saving benefits disappear Millions will lose out as saving benefits disappear

Latest research suggests that hardly any savers will be making real returns on their hard-earned cash if the cost of living continues to rise as predicted.

With historically low interest rates, which have been held at 0.5 per cent for 17 months, and inflation now at 3.2 per cent on the Government’s preferred measure, the Consumer Prices Index, savers are already struggling to get a decent income.

And with inflation expected to rise next week to 3.8 per cent, the number of accounts that will provide any real rate of return after tax has been reduced to a handful.

Darren Cook, of personal finance website Moneyfacts, said: “Interest rates are not high at the moment. If inflation goes up to 3.8 per cent and you allow for tax, your  money is effectively depreciating. All savings accounts will effectively be totally obsolete.”

Mr Cook said people who rely on an income from their savings, especially pensioners, were being hit particularly hard.

“Savers have to fight hard just to break even and avoid losing money.”

Many high street banks offer savers as little as 0.74 per cent interest.

If the CPI hits 3.8 per cent, higher rate taxpayers would need to find an account paying 6.33 per cent to avoid losing money once inflation is taken into account.

Basic rate taxpayers would need to achieve 4.75 per cent.

Moneyfacts estimates that there are currently no accounts providing real returns for higher rate taxpayers and there are just 34 accounts – nearly all fixed rate bonds which require money to be locked in for three years or more – for basic rate taxpayers. That equates to just 0.2 per cent of the savings market.

The real return for a basic rate taxpayer once inflation is taken into account on an average no-notice account is minus 3.21 per cent. That means they would actually lose the equivalent of £321 if they invested £10,000 over a year.

Mr Cook advised savers not to rush out and move their money, however, as this can be counter productive.

“The last thing you want is for savers to go out and change banks or put their money into a riskier investment during this economic uncertainly.

“Savers should try to get the highest interest rate they can and try to spread their money around.”

Andrew Hagger, of website Moneynet, said: “Savers are nearing their wits’ end, and more and more people are going to be giving up the savings habit.”

James Daly, Money Editor at Which?, said: “Our advice is to make sure you’re getting the best possible return on your money at all times.

“If you’re willing to tie up your savings for five years, it’s possible to get as much as 4.75 per cent interest.

“That will still leave you struggling to keep up with inflation, but it’s better than the 2.5 to 3 per cent on offer in more flexible accounts.

“It’s also all the more important to make full use of your ISA allowance so that you minimise the tax you’re paying on your savings.”

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