MILLIONS of savers are losing out because their account does not offer a real rate of return, a leading independent financial adviser (IFA) claims. Despite steady interest rates, people are seeing their returns eroded by inflation.
The Bank of England’s Monetary Policy Committee voted last week to hold the base rate at 4.75 per cent for the sixth time. But Paul Ilott, of Bates Investment Services, the IFA, says: “This doesn’t mean that savers have benefited from stable positive returns once the effects of tax and inflation have been taken into account.”
To earn a real rate of return on your cash, your level of interest must be higher than the rate of inflation. If not, your capital will effectively fall in value. Taxpayers must also earn enough to cover the tax on their interest payments.
Figures released this week show that the underlying rate of inflation has fallen to 2.1 per cent from last year’s high of
2.5 per cent. Despite this drop, many banks and building societies do not offer rates of interest that guarantee a real return for their savers.
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Mr Ilott says: “Many savings accounts offer capital security in nominal terms. But once tax and inflation are calculated, savers are seeing the purchasing power of their cash being eroded.”
To receive a real return on cash, non-taxpayers must use a savings account paying at least 2.1 per cent interest. Basic-rate taxpayers must earn at least 2.63 per cent on their savings, while higher-rate taxpayers who receive less than 3.5 per cent are effectively losing money.
Research from Bates shows that more than 40 per cent of savings accounts, excluding individual savings accounts, do not offer higher-rate taxpayers a real level of return on deposits of £10,000.
In December, when the inflation rate was 2.5 per cent, more than 70 per cent of accounts failed to offer interest rates matching tax and inflation. This level rose to 80 per cent for accounts offered by high street branches.
Mr Ilott says: “Savers should make sure that they maintain positive real rates of return from their savings, having taken tax and inflation into account. In many cases they will have to look beyond their usual savings provider’s range, because choosing the best interest-paying account from their current bank or building society will not be enough in many cases.”
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HSBC has just one account offering 3.5 per cent on a deposit of £10,000. Higher-rate taxpayers who have cash in this account will only break even. Likewise, higher-rate taxpayers with a savings account with smile, the online bank, will not receive a real rate of return because its account pays 3.5 per cent. But you can boost returns by opening a current account with the bank. Its current account offers savers a bonus of three quarters of a percentage point, raising the rate to 4.25 per cent.
Co-operative Bank does not pay 3.5 per cent on deposits of £10,000 in any of its accounts. Its Save Direct account pays 2.06 per cent. Coutts & Co, the private bank, offers 2 per cent on its Private Reserve account, although the rate rises to 3.5 per cent for deposits of more than £250,000.
Savers should be wary of accounts that boost the initial rate of return with a short-term bonus. Scottish Widows Bank offers 5.16 per cent on sums of £10,000 in its Instant Transfer account. But this rate includes an introductory bonus of 0.75 percentage points and the rate falls to 4.41 per cent after six months. This rate will guarantee a real rate of return for higher-rate taxpayers, but Northern Rock’s Silver Savings account pays 5.1 per cent and does not include a short-term bonus.
Choose a web account and the returns are even more attractive. Egg’s Internet Only account pays 5.5 per cent, but again there is a catch. The rate falls to 4.75 per cent when the introductory bonus ends after six months. Alliance & Leicester pays 5.35 per cent on its Online Saver account, with no bonuses.
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GRÁINNE GILMORE