Money Insider: Savers hit by low rates and high inflation

 

There's been plenty for borrowers to cheer about in recent weeks with mortgage rates tumbling across the board and unsecured loan rates falling to their lowest for more than six years, but for savers it's the complete opposite – their situation has become absolutely dire.

Not only are people seeing their interest income diminish before their eyes as savings rates plummet, but to rub salt in to the wound, the inflation figures released this week reveal a sharp increase in the cost of living.

It's no real surprise to hear that inflation is on the up, you've only got to look at the fuel prices being charged on the forecourts as well as the week-on-week increase in the cost of your weekly food shop – and that's before the new gas and electricity price hikes kick in.

The Government and the Bank of England's monetary policy committee have ignored the plight of savers for over four years now, trying to keep rates low in the hope it will enable borrowers to spend more and keep the economy from grinding to a halt.

There's also a view that low mortgage rates will keep people in their homes and limit the number of defaults and repossessions.

The trouble is the money that borrowers are saving on lower monthly mortgage repayments has been swallowed up by the increased cost of living, and if and when interest rates do start to rise, then the affordability issues will start to surface and it won't be pretty.

With the Consumer Price Index (CPI) inflation measure currently hitting 2.7 per cent, it means basic rate taxpayers need to earn a gross rate of 3.375 per cent to maintain the spending power of their savings.

Three or four months ago that wouldn't have been an issue, but since the Funding for Lending scheme was introduced on 1 August, savings rates have fallen off a cliff.

Lenders are no longer relying on cash from savers, hence the reason why best-buy, instant-access accounts are only paying around 2.5 per cent, and in most cases if you want to earn more than the 3.375 per cent it means locking your money away for at least four years.

Despite protestations from MPs and consumer groups, the grim reality is this isn't going to get better anytime soon. In fact, many experts predict interest rates won't pick up for at least another 12-18 months, and as for inflation, the recent rise in fuel and energy prices could keep CPI well above the official 2 per cent target for much of 2013.

So as a saver, what should you do?

It depends on your personal circumstances, but if you're building a savings pot by putting money aside on a weekly or monthly basis, then unless you've got some expensive credit card or overdraft debt to clear, the message is to carry on saving.

While the icing on the cake, your interest, may be wafer thin at the moment, at least your capital will continue to grow and when interest rates eventually pick up, you'll be in a better position to benefit. In the meantime, keep a check on interest rates to get the best return you can.

If you're no longer in a position to add to your savings and rely on them to supplement your income, it's still worth checking the rates and switching your money to squeeze the most you can from the best-buy deals.

There are still dozens of savings accounts paying 0.1 per cent or less, and if your money is sitting in one of these it's time to move it elsewhere as you can easily earn 25 times as much.

If you want instant access to your savings, the best rate you can get is 2.52 per cent from West Bromwich Building Society and 2.5 per cent from Triodos Bank. Both these accounts include an introductory bonus for the first 12 months, so you'll need to switch again this time next year, but at least you're getting the top rate on your cash in the meantime.

If you can manage without access to some of your cash then it's possible to earn a fixed rate of 2.75 per cent for one year or 3.10 per cent for three years, both on offer from Tesco Bank and with the option of receiving your interest monthly.

No matter how low rates are, it's important not to give up on the savings habit – it will always be a smart financial strategy to put some money aside each month, no matter how little interest you receive.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Voices
Barn owls are among species that could be affected
charity appeal
News
Sarah Silverman (middle) with sister Reform Rabbi Susan Silverman (right) and sister actress Laura Silverman (left) at Jerusalem's Western Wall for feminist Hanuka candle-lighting ceremony
peopleControversial comedian stages pro-equality Hanukkah lighting during a protest at Jerusalem's Wailing Wall
Arts and Entertainment
The Bach Choir has been crowned the inaugural winner of Sky Arts’ show The Great Culture Quiz
arts + ents140-year-old choir declared winner of Sky Arts' 'The Great Culture Quiz'
Sport
After another poor series in Sri Lanka, Alastair Cook claimed all players go through a lean period
cricketEoin Morgan reportedly to take over ODI captaincy
PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

    $125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

    Sheridan Maine: Commercial Finance Manager

    Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Sheridan Maine: Regulatory Reporting Accountant

    Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

    Day In a Page

    Homeless Veterans appeal: 'You look for someone who's an inspiration and try to be like them'

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Could cannabis oil reverse the effects of cancer?

    Could cannabis oil reverse effects of cancer?

    As a film following six patients receiving the controversial treatment is released, Kate Hilpern uncovers a very slippery issue
    The Interview movie review: You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here

    The Interview movie review

    You can't see Seth Rogen and James Franco's Kim Jong Un assassination film, but you can read about it here
    Serial mania has propelled podcasts into the cultural mainstream

    How podcasts became mainstream

    People have consumed gripping armchair investigation Serial with a relish typically reserved for box-set binges
    Jesus Christ has become an unlikely pin-up for hipster marketing companies

    Jesus Christ has become an unlikely pin-up

    Kevin Lee Light, aka "Jesus", is the newest client of creative agency Mother while rival agency Anomaly has launched Sexy Jesus, depicting the Messiah in a series of Athena-style poses
    Rosetta space mission voted most important scientific breakthrough of 2014

    A memorable year for science – if not for mice

    The most important scientific breakthroughs of 2014
    Christmas cocktails to make you merry: From eggnog to Brown Betty and Rum Bumpo

    Christmas cocktails to make you merry

    Mulled wine is an essential seasonal treat. But now drinkers are rediscovering other traditional festive tipples. Angela Clutton raises a glass to Christmas cocktails
    5 best activity trackers

    Fitness technology: 5 best activity trackers

    Up the ante in your regimen and change the habits of a lifetime with this wearable tech
    Paul Scholes column: It's a little-known fact, but I have played one of the seven dwarves

    Paul Scholes column

    It's a little-known fact, but I have played one of the seven dwarves
    Fifa's travelling circus once again steals limelight from real stars

    Fifa's travelling circus once again steals limelight from real stars

    Club World Cup kicked into the long grass by the continued farce surrounding Blatter, Garcia, Russia and Qatar
    Frank Warren column: 2014 – boxing is back and winning new fans

    Frank Warren: Boxing is back and winning new fans

    2014 proves it's now one of sport's biggest hitters again
    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas