High inflation rates cancel out returns from savings accounts

As inflation makes a surprise jump to 5.3%, savings accounts fail to offer interest rates higher than the cost of living.

According to experts, millions of savers in Britain will have the value of their investments slashed  by the inflation, marking the first time that not one savings account has been able to match the rising cost of living.

Out of 1,660 savings accounts available on the UK savings market, not a single one offers a real rate of return of more than 5.3%. This includes the whole range of savings products, including fixed rate bonds and ISAs.

The Office for National Statistics said that inflation, as measured by the Retail Prices Index, rose from 4.4% in March to 5.3% last month. The RPI is widely accepted as the most accurate measure of the cost of living as it includes housing costs.

Inflation is currently at the highest level recorded since 1991.

The jump, which was not expected by most economists, came after fuel prices soared to record levels, while mobile phone and telephone bills also went up, along with an increase in food, drink and clothing prices as well as rising mortgage rates.

Many of the increases came as a result of the tax rises announced in Alistair Darling's last budget, pushing up the cost of alcohol and vehicle duty. VAT was restored to 17.5% which also increased prices on almost all high street purchases.

Ros Altman, a savings and pensions expert and former adviser to the government, said: "The Government keeps on saying high inflation is temporary. But anyone with a fixed saving is losing out. And savers were one of the biggest losers already from the recession."

Inflation can erode savings as although an investment may increase in value, it might not be able to keep pace with the increase in prices on the high street.

Ms Altman said: "The effect of inflation is insidious. It creeps up on you. You think you are getting more money every year, through wage increases or interest earned on your savings, but when you go out and try to spend you money you realise you can't afford what you used to be able to.

"You end up poorer. It is as simple as that."

Standard savings accounts require tax to be paid on the interest earned, which means that in order to make any real return, you would need to find an account paying a rate of at least 6.63% for basic rate taxpayers and 8.83% for higher rate taxpayers.

Don't lose more than you need to

Though no bank or building society can offer an account that beats inflation, this doesn't mean you should stop searching for the best savings rates, as the lower the rate, the more you will effectively lose.

Black at Defaqto, a research house that specialises in personal finance, said: "Savers are faring pretty badly, especially those older people who rely exclusively on their savings. There are lots of accounts paying just 0.1%."

According to figures from the Bank of England, the average savings account pays just 0.18%, while the average cash ISA pays a mere 0.46%.

Ruth Lea, the economic adviser to the Arbuthnot Banking Group, said: "Savers will be sitting on loses. And what is the small saver expected to do? Put it in shares? Well, that's pretty risky. With capital gains tax on the rise, investments as a whole have taken a turn for the worse in recent weeks."

Those looking to secure a high rate should consider fixed rate bonds, as these accounts tend to pay the highest returns. For example, if you're willing to lock your funds away for 5 years, the Scottish Widows fixed rate bond may be the account for you, paying 4.45%. If 5 years seems like too much of a commitment, the Lloyds fixed rate bond pays 4.10% on a 3 year term, or the Halifax fixed rate bond paying 3.55%.

Alternatively you may wish to take advantage of you tax free savings allowance and opt for an ISA. Although you can only invest up to £5,100 into a cash ISA, you can still earn up to 4% tax free when fixing the term, so this is definitely worth looking into.

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