Inflation erodes returns on savings

The latest Retail Prices Index reveals that inflation is currently running at 4.6%. This means that higher rate taxpayers need to get a gross return of 7.67% merely to keep pace with inflation. For basic rate taxpayers the return required is a rather more attainable 5.75%.

Higher rate taxpayers can still look to the tax free status of Cash ISAs and also the National Savings & Investments Index-Linked Savings Certificates to provide a real rate of return but beyond those there is now very little available.

Higher rate taxpayers can no longer obtain a real rate of return from:

Instant or easy access accounts
Notice accounts
Fixed rate bonds (despite rates as high as 7.17% being available)

David Black, Principal Consultant of Banking for Defaqto says: "There are currently only twelve accounts - excluding Cash ISAs and the NS&I Index Linked Savings Certificates - that will provide a real rate of return to an adult higher rate taxpayer. Seven of these are regular savings accounts and the other five are current accounts."

"This really demonstrates the advantage gained by using your annual Cash ISA allowance. Some individuals may now have balances of almost £50,000 in Cash ISAs."