Take shelter: Savers face the perfect storm of rising prices and low interest rates
Savers face the perfect storm of rising prices and low interest rates.
They have little chance of keeping the value of savings intact against the headwind of inflation unless they tie up their money for five years — and experts advise against this.
Last week came the grim news inflation is running at 1.8 per cent a year, six times faster than 0.3 per cent this time last year.
And in that time, savings rates have fallen.
Those lucky enough to have National Savings & Investments index-linked bonds are guaranteed to better inflation as their rate rises in line with the cost of living.
The bonds are no longer on sale, but those in them now can roll them over into a new issue when they reach the term end.
The only other savings deal that beats current inflation is a five-year bond. Top deals here include Secure Trust at 2.2 per cent and internet-based Charter Savings Bank at 2.16 per cent.
Patrick Connolly, of independent financial adviser Chase de Vere, says: ‘This is potentially the worst scenario for savers for many years.
‘Rates are expected to stay low for some time, but I’d be wary of tying up money for five years. You have to accept the value of your savings will fall.’
Danny Cox, from advisers Hargreaves Lansdown, agrees: ‘A five-year fixed rate is not good value at these levels. I would go for a top easy-access account or even take a punt on Premium Bonds.’
A year ago, the top easy-access account paid an inflation- busting 1.65 per cent and more than 30 accounts paid 1 per cent or more. Now the best you can do is 1.1 per cent — which is 0.7 per cent below the rise in the cost of living.
This means your £1,000 will buy just £993 worth of goods after a year — even after adding in the interest. On £10,000, that’s a loss in value of £70.
A year ago, the top one-year bond paid 2.06 per cent; now, it’s a below inflation 1.6 per cent.
Things are set to get worse.
The Bank of England forecasts inflation will peak at 2.8 per cent in the first half of next year before falling back to 2.4 per cent in three years. But some economists think it will rise to 3 per cent or more.
Samuel Tombs, UK chief economist at Pantheon Macro-economics, says: ‘We expect inflation to reach 3 per cent in May and to peak at 3.5 per cent later this year.’
The top easy-access rate of 1.1 per cent comes from internet-based RCI Bank. Next is Paragon Bank’s cash Isa at 1.05 per cent.
In the High Street, the best you can do is 1.01 per cent from Virgin Money Defined Access Saver.
But you earn this only if you limit the number of withdrawals from your account to three or less a year. Otherwise you can earn 0.85 per cent from Coventry BS.
If you are happy to tie up your money for a year, top deals include Charter Savings Bank’s new bond at 1.6 per cent, but you have to open it online. The best branch or postal account deal is Leeds BS 15-month Access Bond at 1.2 per cent.
Its big plus is that you can have access to half your money during the term without paying any penalty.
It runs until May 2 next year and you get your money back on May 3 when it is moved to the society’s instant access maturity account.