Who says the recession is over?

I watched a television program today on inflation and savings which I thought was really useful so I have highlighted the points which I thought were the most illuminating.

Prices across the UK are still rising by 1.5% but anyone with any savings will have noticed that our bank accounts are not even paying that amount in interest, so it means the value of our money is being eaten away.

Over the last 10 years or so, we have been used to the base rate being well above the rate of inflation. For example, in September 2007, the base rate was 5.75% and the rate of inflation was 1.8%. If you take one from another, you get the Real interest rate which is the amount earned, after inflation has eroded away our money.

If we compare that to today, where the base rate is 0.5% and the rate of inflation is 1.5%, then the Real interest rate stands at -1%.

Even if we do save at the poor rate of 0.5%, we still have to pay tax on what little interest we may have earned. The basic tax payer pays 20%, so in other words, in order to beat inflation at 1.5%, you would have to earn 1.875% to start making any real money at all. The higher tax payer would have to earn 2.5% interest to make any money on his savings, and it is definitely worth knowing that almost 80% of all banks pay less than that figure.

What can we do?

1. Use your ISA allowance (Individual Savings Accounts)
These are accounts which you don’t have to pay tax on. The current limit is £7,200 with a maximum cash investment of £3,600. For the over 50s, the annual limit is £10,200. However by April 2010, everyone will be able to take advantage of these tax free savings up to £10,200 and the cash limit in the overall allowance will rise to £5,100.
There are over 18 million Isa account holders in the UK, with over 5 million using the full allowance each year.

2. Shop around.and look out for promotional rates. The banks and building societies show no loyalty to their customers, so why should the customers leave their money in their chosen savings accounts when they could be earning greater interest elsewhere. Citibank are offering 2.47% variable gross per annum on savings accounts opened after Nov 19th 2009 on their Flexible Saver Account Issue 7 and West Bromwich are offering 3.38% on new funds, with a minimum opening balance of just £100 (Branch Bonus Account 2)

3. Consider Fixed Rate Bonds, but only if you happy to make a long term investment. A fixed rate bond is ideal for those who have money to invest but who won’t need access to that money for 4/5 years.

Personally, I have found that by going to the comparison sites online, you can usually find which banks and building societies are offering the best rates for the sums of money and/or the period of time you wish to invest.

About the Author

Sally is a former mortgage advisor, enthusiastic writer and keen student of all things internet, her latest site is about retro style radios and in particular the Crosley Retro Radio Range .