99 savings accounts hanging on a wall…

Thursday, 16 October 2014
Experts were caught out by the size of the drop in the Consumer Price Index (CPI) this week from 1.5% to 1.2%, with most expecting the fall to be much smaller. It’s certainly far from the official Bank of England target of 2.00% and it’s almost back to its lowest ever level of 1.1%, which was witnessed in September 2009.

However, the lower CPI does give us a prime opportunity as savers to find an account that beats inflation. Beating inflation is crucial because this week’s announcement means that the effect of inflation on £10,000 invested five years ago, allowing for average interest and tax at 20%, would have the spending power of just £8,730 today – a fall of 12.70%.

So, what does an account need to pay to beat tax and inflation?
Now that inflation has fallen again, a basic rate taxpayer at 20% will be hunting for a savings account that pays at least 1.5% per annum, while a higher rate taxpayer at 40% will need to find an account that pays at least 1.9%.

A quick tally of the accounts on the market today reveals that 170 out of 621 non-ISA accounts pay enough for a basic rate taxpayer to negate the effects of both tax and inflation.

ISAs are slightly better as they are tax-free to start off with, so it is merely the inflation figure that needs to be surpassed; and 152 out of 212 ISAs do just that.

So, at long last there is some good news for savers, because today there are 99 more accounts to choose from than this time last month (when we had a choice of just 223). This is also the first time in two years that any easy access or notice account has beaten tax and inflation, which has to be welcome news after such a long drought.

But before anyone starts hanging out the bunting, it must be admitted that the interest offered on savings accounts generally is still poor as the cold tentacles of the Government-backed Funding for Lending Scheme can still be felt.

Because the scheme offered to lend banks and building societies cheap money, they stopped needing savers’ money, and while the scheme has thankfully been wound up early, the money lent has not yet all been spent, so savings rates are still depressed – as, no doubt, are many savers!

Today, the average interest paid across the ISA range is an uninspiring 1.56% (and to think that I moaned when it was 1.70%!). Five years ago, we could get 3.75% in a no notice account, but today we would need to invest for a staggering seven years just to get 3.52%.

Best paying accounts
Thanks to inflation being so low, we do at last have options – such as the easy access account from BM Savings that pays a market-leading rate of 1.60%. This is ideal if you think you will need to move your money quickly – if, for instance, you think that interest rates may rise imminently. On the other hand, should you prefer to invest at a fixed rate, Bank of Cyprus is offering 2.00% on its 18-month bond.  

If you haven’t yet used your ISA allowance, the Post Office has a one-year bond paying 1.70%.

And of course, these days there is the additional option of one of the high interest current accounts, such as TSB or Santander’s 123 account, although I suspect that many people of retirement age will be waiting for more news of the Pensioner Bond due to be released next January, which has an expected interest rate of 4.00%.

By next year, I would hope that providers are once again looking to entice us back through their doors with some real competition. But for now, things are getting slightly better on the savings front - if only due to the incredibly low inflation rate. The question is, will it all change again next month? I have my suspicions…