Savings accounts face 'obsolescence'

The twin pressures of stubbornly high inflation and low interest rates could render savings accounts obsolete, it has been warned.

With the Bank of England's base rate held at 0.5 per cent and with the consumer prices index rate of inflation at 3.2 per cent, it is estimated that any further spikes in the cost of living could mean that nobody would be guaranteed a return on their money.

At the moment, higher rate taxpayers have no accounts open to them that deliver a real return once tax and inflation have been factored in.

For basic rate taxpayers the picture is almost as grim, with just a few accounts offering interest rates at a level sufficient to offset inflation and tax. Of these, the majority are fixed rate bonds that demand savers lock in their funds for three years or longer.

Should inflation breach the 3.8 per cent mark in the future, then no savers will have access to accounts that produce a return.

Darren Cook of the financial website Moneyfacts said: "If inflation rises to 3.8 per cent, all savings accounts will effectively be totally obsolete.

"Savers have to fight hard to get within an arm's length just to break even and avoid losing money."

It is a view echoed by Andrew Hagger of website Moneynet: "Savers are nearing their wits' end, and more and more people are going to be giving up the savings habit."

Once at 3.8 per cent, inflation would require a higher rate taxpayer to put their money in a savings account with an interest rate of 6.33 per cent in order to deliver an income; for basic rate taxpayers the figure would be 4.75 per cent.