Savers are being left with little choice other than to watch their cash be eroded away, after CPI inflation rocketed to 5.1 per cent in November.
Whether you are saving in or towards retirement, for a wedding, to build an emergency fund, or for the deposit on your first home or a move, there is no place to hide from its effects.
The top paying easy access, notice accounts and fixed rate deals are all woefully failing to keep pace with rising prices, but there are steps savers can take to try to make their money work as hard as possible.
Petrol prices hit a record high, used car prices are up almost a third in seven months, and gas and electricity prices rose at their fastest rate for more than decade.
Inflation, which was previously recorded at 4.2 per cent in October has reached the highest level it has been for 10 years driven on by soaring petrol, gas and electricity prices.
This time last year petrol prices were 112.6 pence per litre, but this November they hit 145.8 pence, meaning filling up a 50 litre car now costs £16.60 more than this 12 months ago.
Energy prices are also rising at an alarming rate each month – the price of electricity is up 18.8 per cent in a year, and gas is up 28.1 per cent.
Home repairs, food prices, second hand cars and new furniture are also on the up, according to the latest ONS figures.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown said: ‘What’s particularly alarming about many of these price rises is that once we’ve shopped around and traded down, there’s nothing we can do to cut costs except make horrible sacrifices.
‘It’s why so many people are having to make difficult decisions about heating their homes and the journeys they can afford to make, and are having to put off essential home repairs and maintenance that will cost them far more in the long run.
‘The price of electricity and gas is rising faster than at any other time since 2009, so it’s no wonder so many people are taking drastic steps to cut down on energy use this winter.’
|What||How much has it risen?|
|Petrol||Up 29.5% year-on-year|
|Gas||Up 28.1% year-on-year|
|Electricity||Up 18.8% year-on-year|
|Second-hand cars||Up 31.3% since April this year|
|Margarine||Up 14.5% year-on-year|
|Clothes and shoes||Up 10.7% year-on-year|
|Tradesmen repairs||Up 13.7% year-on-year|
|Wooden floors||Up 18.2% year-on-year|
|New furniture||Up 12.2% year-on-year|
|Milk||Up 5.7% year-on-year|
|Ready meals||Up 5.1% year-on-year|
|Credit: Hargreaves Lansdown|
What does this mean for savers?
The continuing rise of inflation means the outlook for savers is bleak, at least in the short-to-medium term.
At present, there is not one savings deal able to even come close to keeping pace with inflation let alone outpace it.
The top pay easy access deal pays 0.71 per cent, whilst the best one year fixed rate pays 1.41 per cent.
Someone with £10,000 stashed away in the best one year fixed rate deal they could expect to have £10,137 come next year.
But if inflation averages 5.1 per cent over the next year, in real terms that £10,137 would in fact be worth £9,631 in 12 months time.
The real interest of such an account would be minus 3.69 per cent, as the purchasing power of nominal cash is eroded over the course of 12 months.
Savers are seeing the value of their cash fall in real terms. £10,000 today has the same purchasing power as £9,490 this time last year.
Even someone fixing with best paying five year deal will see the value of their savings in real terms fall by 3 per cent based on current inflation figures – the market-leading five year deal pays 2.1 per cent.
However, most savers are unlikely to have their cash in the best paying accounts and are more likely to have their money floundering in legacy accounts, with some high street banks paying as little as 0.01 per cent.
Hypothetically, if your cash were to remain in such an account and inflation were to rise by an average of 5.1 per cent for 15 years, you could expect your money to have half the purchasing power it has today by the end of 2036.
Rachel Springall, finance expert at Moneyfacts said: ‘Inflation continues to take its toll on savers’ cash and may well do so for many months to come.
‘Since the last inflation announcement, some of the top fixed rate bonds have improved, but elsewhere some fixed rate Isas have worsened.
‘These fluctuations reiterate the importance for savers to keep a close eye on the changing market and switch quickly to take advantage of a top rate.’
Should savers trust in a base rate rise?
Soaring inflation could force the Bank of England to intervene with an interest rate hike to try and drag down inflation closer to its long term target of 2 per cent.
But even if the monetary policy committee decides to raise the base rate, a rise will be small and there are few who believe this will have any real impact on savings rates.
Adrian Lowery of investing platform Bestinvest said: ‘The unexpectedly rapid spread of the Omicron variant, and fears of an economic relapse, have made an imminent hike less likely – but this surge in price pressures could bring out a couple of the inflation hawks on the MPC to vote for a small rate rise.
‘Either way real interest rates for savers will remain resoundingly negative for the foreseeable future.’
|Type of account (min investment)||0% tax||20% tax||40% tax|
|Gatehouse Bank (£1,000+)||1.41||1.13||0.85|
|Masthaven Bank (£500+)||1.39||1.11||0.83|
|Zopa Bank (£1,000)||1.61||1.29||0.97|
|Gatehouse Bank (£1,000+)||1.60||1.28||0.96|
|Secure Trust Bank (£1,000+)||1.60||1.28||0.96|
|QIB (UK) (£1,000+) (3)||1.85||1.48||1.11|
|Gatehouse Bank (£1,000+) (3)||1.78||1.42||1.07|
|QIB (UK) (£1,000+) (3)||2.10||1.68||1.26|
|Hodge Bank (£1,000+)||2.08||1.66||1.25|
James Blower, founder of the Saving Guru adds: ‘I think the news is likely to increase the chances of a base rate rise in the New Year.
‘However, although it’s likely to be passed on to borrowers in full, savers are unlikely to see any benefit from any base rate increase.’
Therefore, even if an interest rate hike is near, waiting for a rate rise instead of fixing your savings rate could turn out to be an expensive mistake.
‘Once it hits, there’s every chance that huge numbers of banks won’t pass the rise on and even if they do, they may only boost rates by a fraction, and it could take them weeks,’ adds Coles.
So what should savers do?
Sadly, there is no magic wand for savers to wave. However, they can at least try to make the best of a bad situation.
Savings rates may only get worse and the advice to savers is to try and secure a market leading deal sooner rather than later.
Alternatively, with money over and above a rainy day pot safely held in cash – and that they will not need in its entirety in the short term – they could take some risk and invest for higher returns instead.
For example, a simple tracker following the UK stock market, the Vanguard FTSE UK All Share fund, is up 15.7 per cent over 12 months, while HSBC’s FTSE All World Index global tracker fund is up 20 per cent over the past year.
There is not one savings account that can outpace inflation at 5.1 per cent.
Blower said: ‘While I expect rates will increase in 2022, this is likely to be very gradual and in small increments.
‘I think the Investec 0.71 per cent Online Flexi saver is worth grabbing now as I suspect it might be gone by Christmas and, if so, this will trigger a fall back in easy access rates to 0.6 per cent or 0.65 per cent.
‘But anyone sitting in instant access waiting for 2 per cent from a one year fixed rate deal in 2022 is likely to be disappointed!
‘I wouldn’t look further than fixing for 1 Year so Gatehouse’s 1.41 per cent deal or Zopa’s 1.37 per cent deal are worth securing as I can’t see anyone going above 1.4 per cent in the short term.’
Savvy savers with a spare £10,000 could also explore the option of joining the savings platform Raisin.
It is currently offering a welcome bonus giving savers the chance to boost their savings by £50 when they open and fund an account on its marketplace with a minimum of £10,000.
It’s best paying one year deal offered via Charter Savings bank is currently paying 1.33 per cent but after adding the £50 bonus, the return on a £10,000 deposit would effectively work out as 1.83 per cent.
Compare the best DIY investing platforms and stocks & shares Isa
Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it’s important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare investment accounts, we’ve crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
|Admin charge||Charges notes||Fund dealing||Standard share, trust, ETF dealing||Regular investing||Dividend reinvestment|
|AJ Bell YouInvest||0.25%||Max £3.50 per month for shares, trusts, ETFs.||£1.50||£9.95||£1.50||1% (Min £1.50, max £9.95)||More details|
|Charles Stanley Direct||0.35%||No platform fee on shares if a trade in that month and annual max of £240||Free||£11.50||n/a||n/a||More details|
|Fidelity||0.35% on funds||£45 fee up to £7,500. Max £45 per year for shares, trusts, ETFs||Free||£10||Free funds £1.50 shares, trusts ETFs||£1.50||More details|
|Hargreaves Lansdown||0.45%||Capped at £45 for shares, trusts, ETFs||Free||£11.95||£1.50||1% (£1 min, £10 max)||More details|
|Interactive Investor||£119.88 as £9.99 per month||£7.99 per month back in trading credit||£7.99||£7.99||Free||£0.99||More details|
|iWeb||£100 one-off||£5||£5||n/a||2%, max £5||More details|
|Freetrade||Free for standard account £3 month for Isa||Freetrade Plus with more investments is £9.99/month inc. Isa fee||No funds||Free||n/a||n/a||More details|
Only Vanguard funds
|Free||Free only Vanguard ETFs||Free||n/a||More details|
|(Source: ThisisMoney.co.uk July 2021. Admin charges quoted annually, may be monthly or quarterly)|
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