Double woe for savers

Andrew Hagger of Moneynet.co.uk looks at the latest inflation figures and how the position for longer term savers has worsened over the last 6 months.

Inflation is almost back to the CPI peak of 3.50% witnessed in January this year, however the situation for those savers seeking shelter in fixed rate savings has taken an additional turn for the worse compared with just six months ago.

Back in October 2009, CPI was running at 1.50%, 1.90% lower than the March 2010 figure reported today, however that's only the first piece of bad news.

Whilst base rate has remained constant, unfortunately the same can't be said for the best buy rates on offer in the fixed rate bonds market.

1, 4 and 5 year best buy rates have been hit hardest with reductions of 0.75%, 0.65% and 0.65% respectively during the last half year.

So not only is inflation taking a bigger bite out of savers spending power, the rates on offer have tumbled by up to 19%.

For example someone investing £50,000 in a one year bond with NS&I at 3.95% last October will accrue gross interest of £1975 over the 12 month term compared with just £1600 for someone opting for the current 3.20% best buy from Kent Reliance Building Society today.

The position for longer term savers is equally bleak, whereas six months ago you could have got 5.65% from Yorkshire Bank and earned £14125 before tax with a five year bond; the best rate on offer today of 5% from State Bank of India would produce £1625 less at £12,500.

The competition for deposits which drove up fixed rates in the second half of last year has all but faded away and even those plumping for tax free savings will have been disappointed by the number of ISA rate cuts seen during the last few weeks as well as the reluctance by institutions offering the best rates to accept transfers in.

The situation for savers has been dire ever since the Government turned to its rate cutting strategy in October 2008 and there's precious little in any of the manifestos from the three main political parties to indicate that the situation will improve after the 6th of May.