What is inflation doing to your savings?

The rate of inflation, as measured by the UK consumer prices index, rose to 2.8% in February 2013, according to the Office for National Statistics.

The change in the rate follows four consecutive months at 2.7%. The increase stems from the rises in gas and electricity bills, petrol and diesel prices and air transport costs. These were slightly offset by smaller price increases for food and soft drinks than a year ago and price falls for alcohol compared with price rises a year ago.

Inflation and the ‘Real Rate of Return’

The interest you receive on your savings may increase the total amount of money in your savings account, but are you really any better off than when you first set the money aside?

For instance, if your money has been earning 2.8% net of tax (or tax-free in the case of a Cash ISA) over the past year, then the ‘real rate of return’, adjusted for the effects of inflation, is zero. That’s because, although your savings ‘pot’ has increased from, say, £100.00 to £102.80 (given a 2.8% rate of interest) the goods that the money can buy have also increased in cost from £100.00 to £102.80 (given a 2.8% inflation rate). So you are no better off.

Even if you invest in a market-leading Cash ISA (currently 3.1% fixed for 4 years with the Halifax) with the official inflation rate at 2.8%, the real rate of return is just 0.3%. And that will decrease further if inflation increases in the next four years.

That’s why it may pay to consider an alternative form of saving product; Structured Deposit Accounts, which are essentially Cash ISAs, with the same protection that you would get from a High Street bank account. We wrote about these products in an earlier article here.

Real Rate of Return Calculator

If you want to calculate the real rate of return on your savings, there is a website that offers just such a service. It asks you to enter the amount of your savings, the interest rate you are receiving, the rate of tax you pay and an estimate for future inflation (expected to be around 3% for the foreseeable future). Then you decide when you might want to spend your money. The Real Rate of Return Calculator will then show you how much your savings might be worth at today’s prices.

Just follow this link, which takes you to the saveoursavers.co.uk website in a new window.

Then, when you’ve seen the real rate of return on your savings, contact Marchwood and ask us about how we can help protect your savings from inflation’s rather unpleasant side-effects.