Savers hit by rising inflation

Posted on February 18th, 2011 | Categories - Savings

The rise in inflation means that savers have to place their cash in better accounts to make a return.

People who rely on their savings will be most affected by the rise in inflation.

The value of savings may be eroded further following the rise in the Consumer Prices Index to 4.1% in January.

Financial website Moneyfacts.co.uk said that the current average rate on a savings account is 0.83%. Basic rate taxpayers who continue to keep their cash in low return accounts could see the value of their money eroded by 3.34% a year.

A basic rate taxpayer needs to place their savings in an account paying at least 5% in order to make a return. Higher rate tax payers are worse off as they need to locate an account with an interest rate of 6.67% to ensure that the value of their savings does not fall after tax and inflation figures are taken into account.

However, Moneyfacts.co.uk has highlighted that just 23 accounts that are currently on the market today are suitable for basic rate taxpayers – 21 are available for higher rate taxpayers. This marks a significant fall from last September’s figures where 118 accounts on the market offered rates that beat inflation.

Sylvia Waycot at Moneyfacts.co.uk said: “The additional hike in CPI largely correlates to the rise in VAT. Whilst this tax on spending does not directly impact on exempt essentials such as food, its indirect effect via higher ruel and distribution costs inevitably drives up all consumables. Those reliant on their savings income will undoubtedly find their level of ‘savings pain’ harder to endure”.

She added that rise in inflation will affect groups such as pensioners the most as they tend to rely on their savings instead of other sources of income.