Finding an inflation-busting safe haven for savings

Finding a safe financial haven from inflation is the big expectation of IFA clients as the cost of living keeps rising.

Most high street banks and building societies offer miserly rates of interest that are eating away at cash savings.

But some places still offer inflation-busting rates – if advisers and their clients know where to look.

The latest consumer price index (CPI) inflation figure is 5.2 per cent for September and rising.

Bank of England governor Mervyn King reckons CPI has hit a peak, but the punishing cost of living indicator is the retail price index (RPI), the old official measure of inflation, which stands even higher than CPI at 5.6 per cent.

The difference comes from statisticians stripping housing costs out of the CPI, while RPI includes them.

For savings to keep pace with inflation, a client who does not pay income tax needs a rate of return from a cash ISA or high interest bond to match CPI or RPI.

The problem is the fixed rate bond with the best rate is a 5-year bond from Saga with 4.65 per cent rate – equating to a real return of -1.88 per cent on RPI.

Cash ISAs fare no better. The best buy is another 5-year fixed rate deal, this time from the Halifax, giving a real return of -1.20 per cent against RPI.

Income taxpayers are even worse off even at the lowest rate.

To match CPI, a basic rate income tax payer (20 per cent) needs a gross return of 6.5 per cent or 7 per cent to run alongside RPI.

A 40 per cent higher rate taxpayer needs an account with 8.76 per cent gross to keep up with CPI or 9.33 per cent to cover RPI.

Top rate 50 per cent taxpayers must find a return of 10.4 per cent gross to counter CPI or 11.2 per cent for RPI.

The only savings giving a real return on RPI are from BM Savings or the Post Office, with bonds with earnings of between 0.24 per cent and 0.98 per cent, depending on the fixed rate term and amount invested.

David Black, independent financial services monitor Defaqto’s Insight Analyst for Banking, said: “Fixed rate bonds continue to offer higher interest rates than variable rate accounts but it is a bitter blow that even if you choose a ‘best buy’ account you are still losing money in real terms. It’s a sad fact that the combined effects of taxation, high inflation and a low base rate are continuing to decimate savings.

“Taxpayers can use a Cash ISA or an offset mortgage to negate the impact of taxation but beyond that savers can only really reduce the losses on their savings by ensuring that they get the best available deal on their savings by regularly reviewing their variable rate accounts. There are also a number of Retail Prices Inflation linked accounts but these would need to be held as a Cash ISA or by a non-taxpayer to guarantee not losing money in real terms.

“An alternative approach is to pay off expensive debt, such as store cards, credit cards, overdrafts and unsecured loans, as these generally charge significantly higher rates than can be earned on savings accounts. However retaining some savings to deal with emergencies is a sensible precaution.”