Savers still struggling despite inflation drop

Basic rate taxpayers still need a savings account paying in excess of 5% to beat the effects of inflation and tax

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• Mark King
• guardian.co.uk, Tuesday 12 April 2011 11.07 BST
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Consumers battling inflation have less cash to put away as savings. Photograph: Pearl Bucknall/Alamy
The drop in inflation from 4.4% to 4% seen in March will do nothing to stop the rising trend that has seen nearly one in 10 consumers stop saving in 2011, and it remains "desperate times for savers", according to industry experts. The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest, inflation and tax at 20%, would be worth just £9,587 today. The drop in the CPI figure now means basic rate taxpayers need to find a savings account paying 5.01% if they are to counter the effects of inflation. A higher rate taxpayer needs to find an account paying at least 6.67%, while 50% taxpayers need to find a return of 8.01%. But there are no instant access accounts that will match or beat inflation plus tax at the basic rate. Moreover, there are no inflation-beating accounts at all available to higher rate taxpayers, and no accounts available for any taxpayer that beats the RPI figure, which includes mortgage borrowing and stands at 5.3%. According to Moneyfacts, basic rate taxpayers can only choose from 25 accounts that negate the effects of tax and inflation. Spokeswoman Sylvia Waycot said: "Whilst a fall in inflation is welcome, it won't change the fortunes of the nation's savers who are still battling against shrinking spending power and a lack of inflation-beating savings accounts. "CPI is still double the government's 2% target, which spells desperate times for savers who have almost nowhere to place their money to beat inflation. Pensioners trying to supplement their income with interest will feel the ensuing pain the most." Of the 25 accounts available to basic rate taxpayers – down from 118 six months ago – 24 are fixed-rate Isas. But Waycot says cash Isas limit the amount of investment, and therefore return, which is a further hindrance when trying to make ends met. According to moneysupermarket.com, one in five people save less than they used to because of the rising cost of living, and more than half the nation cannot afford to save at all. It says one in eight of its users is instead taking advantage of low interest rates to overpay their mortgage. Head of banking, Kevin Mountford, said: "With cuts in benefits, rises in national insurance contributions, the lowering of the higher rate tax threshold and the general increase in the costs of living, many Brits are feeling the squeeze. Unfortunately, savings become one of the first casualties when people have to tighten their purse strings." Andrew Hagger of Moneynet.co.uk said that to get 5% savers need to tie their cash up in a fixed-rate bond for five years. "Both AA Savings and Principality building society offer 5% for five years, but they are the only two bonds that do," he said. "It remains a very tough environment for savers still battling against the crippling combination of low rates and high inflationary pressures."