Individuals relying on their savings to supplement their income could struggle, following the rise in the Consumer Prices Index to 4 per cent in January.
A basic rate taxpayer now needs to find an account paying at least 5 per cent just to stop the value of their savings eroding in value. Higher-rate taxpayers face an even bigger challenge as they must find an account offering interest of 6.67 per cent to prevent the value of their savings falling, once tax and inflation are taken into account.
But financial information group Moneyfacts.co.uk said there were only 23 accounts available with returns of the level basic rate taxpayers need and just 21 that would enable higher rate taxpayers to make a real return on their money.
All but two of these accounts are fixed-rate bonds, under which savers have to lock up their money for four or five years, all of which are are also individual savings accounts (Isas). The remaining two accounts require savers to also invest money in equities.
Savers using their tax-free allowance need to make returns of only 4 per cent to beat inflation because no income tax is charged on interest paid on Isas. But people can only invest up to £5,100 in an Isa during the current tax year, meaning savers will struggle to find a home for the rest of their money if they want to get a real return.
Moneyfacts said a basic rate taxpayer who held their money in a savings account paying the current average rate of 0.83 per cent would actually see the value of their cash eroded by 3.34 per cent a year in real terms.
As a result, it said £10,000 invested in January 2008, would now have the spending power of just £9,325.
The number of savings accounts that enable basic rate taxpayers to beat inflation has fallen from 118 in September to just 23 today.
“The additional hike in CPI largely correlates to the rise in VAT. Whilst this tax on spending does not directly impact on exempt essentials such as food, its indirect effect via higher ruel and distribution costs inevitably direves up all consumables,” said Sylvia Waycot at Moneyfacts.co.uk. “Those reliant on their savings income will undoubtedly find their level of ‘savings pain’ harder to endure.”
She said the rise in inflation will hit those who rely on their savings to supplement their income the most, in particular pensioners.