Inflation eats into savings

The latest Consumer Prices Index (CPI) announcement reveals that inflation is currently running at 5.2%. This means that a basic rate taxpayer needs a gross return of 6.50% merely to keep pace with inflation. A higher rate taxpayer would need a gross return of 8.67%. For the Retail Prices Index inflation rate of 5.0% the corresponding returns required would be 6.25% for a basic rate taxpayer and 8.33% for a higher rate taxpayer.

Higher rate taxpayers can still look to the tax free status of Cash ISAs and National Savings & Investments Index-Linked Savings Certificates[1] to provide a real rate of return but beyond those there is now very little available.

David Black, Principal Consultant of Banking for Defaqto says: "Outside of Cash ISAs even basic rate taxpayers now face a struggle to earn a real rate of return on their savings. To exacerbate this situation further many variable rate accounts will see rates being reduced over the next two or three weeks as a result of the base rate change. The crumb of comfort for the future is that the rate of inflation is widely predicted to fall in coming months."