Saturday, February 20, 2010

Millions of Britons Losing Money on Savings

The Telegraph-UK
Millions of savers are losing money by putting their cash into a savings account due to poor investment returns and the increasing cost of living, it has been disclosed. Savers are suffering despite Barclays, Britain third-largest bank, reporting profits of £11.6 billion for 2009.

Rising inflation is eroding the spending power of savers’ cash and, combined with historically low interest rates, is leaving them with less money than when they started. Savers have already been badly hit by shrinking rates of return following Bank of England interest rates dropping to 0.5 per cent.

But the jump in inflation to 3.5 per cent, released in official figures yesterday, came as a fresh blow to hard-pressed pensioners and those trying to live off their savings. Politicians and financial experts said it will leave millions of savers "devastated".

With the consumer prices index rising to 3.5 per cent, basic rate taxpayers now need to earn a rate of 4.38 per cent on their savings before they begin to see a real return, while higher rate tax payers need to earn 5.83 per cent.

But with typical rates on a no notice savings account dropping to 0.02 per cent to 0.73 per cent in the past month, it means basic rate taxpayers are losing the equivalent of 2.92 per cent a year, with higher rate tax payers losing 3.06 per cent, according to the figures from personal finance statisticians Moneyfacts.

Just two accounts out of a total of 1,101 savings accounts produce a real rate of return for higher tax payers once tax and inflation are taken into account. However, these accounts are only for regular savers and not for those with a lump sum to invest, according to the data produced exclusively for The Daily Telegraph. And total of only 52 accounts produce a real return for basic rate taxpayers.
avers are suffering despite Barclays, Britain’s third-largest bank, reporting profits of £11.6 billion for 2009 and speculation that the excessive bonus culture is returning to the City. Vince Cable of the Liberal Democrats, said: “Negative real interest rates are a killer for savers.

“It will not make it possible for Britain to switch from being a nation that is excessively in debt to a society based on prudent saving.” Darren Cook, a spokesman for Moneyfacts said: “Each month, inflation is cutting deeper into people’s spending power and lower savings interest rates are creating an even bitterer pill to swallow.

“Those who are relying on their savings pot to subsidise other income are seeing their savings being eroded. “Savers are hoping that this is just a short spike in inflation, but will lead to further aggravating issues if inflation does not fall as quickly as it is going up.”

David Black, a banking expert at personal finance researchers Defaqto, said: “Those reliant on savings interest to supplement inadequate income will be devastated by this double whammy of rising inflation and low interest rates.” The Consumer Prices Index, the Government’s preferred measure of inflation, jumped to a 14-month high of 3.5 per cent last month, the Office for National Statistics disclosed.

The rise was blamed on the return of Value Added Tax to 17.5 per cent. The Government had previously reduced VAT to 15 per cent on a temporary basis until last month to try to boost consumer spending and ease the recession. The Retail Prices Index – which includes the cost of mortgages and housing - also rose sharply in January to 3.7 per cent.

Economists said the rise in inflation increases the prospect that the Bank of England will maintain the Bank Rate its current level. Howard Archer, an economist at Global Insight said: “When interest rates finally do start to rise the increases are likely to be gradual.”

Individual Savings Accounts offer an additional small glimmer of hope for basic rate taxpayers, but there is nothing available to higher rate taxpayers. National Savings & Investments offer three and five year Index Linked Certificates that are tax free and pay 1 per cent above RPI inflation.

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