Outlook for savers worsens as inflation rises again

Savers are likely to see a further drop in the value of their money following January's sharp rise in the rate of inflation.

Last month the Consumer Prices Index climbed to 3.5 per cent, up from the 2.9 per cent registered in December.

It was the second largest increase in the annual rate of inflation between two months, the result of a hike in fuel prices and the return of the rate of VAT to 17.5 per cent.

According to Moneyfacts.co.uk, the financial information website, for basic-rate taxpayers with an average instant access savings account the yield on their funds could fall by as much as 2.92 per cent. For higher-rate taxpayers, the decline could be 3.06 per cent.

The rise in inflation, combined with the tax paid on savings, means that a basic-rate taxpayer will require an account that delivers 4.38 per cent gross in order to secure a return. For a higher-rate taxpayer, that interest rate is 5.83 per cent.

However, just two from a total of 1,101 accounts offer guarantees of such rates of return and they are limited to regular savers rather than those with a lump sum to invest.

Darren Cook, Spokesman for moneyfacts.co.uk, 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."

For savers with mortgages, any hope of meeting the rise in the Retail Prices Index, which was up from 2.4 per cent to 3.7 per cent in January, demands an interest rate of at least 4.62 per cent for basic-rate taxpayers and 6.17 per cent for higher-rate taxpayers.

Kevin Mountford, head of banking at moneysupermarket.com, commented: "The latest inflation news is a bitter blow for savers. There is a danger that many will do nothing because of the belief that there is little point, but this is not the time to be apathetic. Yes, it's getting harder to earn a positive return on your savings, but rather than sitting back and doing nothing, it is more important than ever for savers to proactively seek the best returns possible on their money.

"Given the low number of products which offer a return above inflation, savers really need to keep a close eye on the interest rate, especially on fixed-term accounts whose rate may come crashing down after the term ends."

With the banks yet to respond to the January inflation figures, Mr Mountford added: "We have actually seen a fall in savings rates since the start of the year, so I hope we will start to see a change upwards so savers don't lose out even more."