Money News

Surprise inflation hike hurts savers

By Martin Fagan - news@consumerchoices.co.uk

Only 1.1% of savings accounts on the market provide savers with a real rate of return.

A surprise increase in the rate of inflation in April has drastically reduced the number of savings accounts that provide savers with a real rate of return.

As any interest paid on savings is taxed at 20%, only 1.1% of the 1,869 savings accounts currently on the market provide a real rate of return to basic rate taxpayers, according to independent financial research company Defaqto.

The annual rate of inflation based on the UK Consumer Prices Index (CPI) rose by 0.5% to 4.5% in April, a bigger rise than analysts had forecast, especially as it followed a surprise fall in March.

For savers to beat inflation, Defaqto said a basic rate taxpayer would need a pre-tax rate of 5.625%, while a 40% taxpayer would need to find a product paying 7.5% and a 50% taxpayer would require one paying 9%.

Defaqto said there are currently only 16 accounts that will give a basic rate taxpayer a real return based on CPI.

"Our figures show savers are facing a struggle to achieve a real return on their savings,” said David Black, banking analyst at Defaqto.

“With high inflation on one hand and a prolonged low-base rate on the other, the current economic environment is really impacting on savers, with even basic rate taxpayers losing money.”

CPI inflation is now at its highest level since October 2008. The Office for National Statistics (ONS) said the largest upward effect on prices came from air transport, where fares rose by 29% between March and April, while alcoholic drinks and tobacco rose by a record 5.3%.