Inflation Busting Cash ISA Accounts

Inflation has fallen to 2.7% in August, but there are still only a handful of cash ISAs that offer savers a real rate of return

Emma Wall 17 September, 2013 | 11:16AM
Facebook Twitter LinkedIn

Inflation has fallen 10 basis points to 2.7% in August. While this is good news for the new Bank of England governor Mark Carney, the average household is still struggling with pay freezes and poor returns on cash. 

This is not set to improve any time soon either. If Carney's forward guidance - where Bank of England base rate is linked to economic statistics - is regimentally implemented savers can expect low rates for at least the next 12 months. 

The change in inflation leaves UK households collectively needing to find an extra £17.7 billion a year to maintain their standard of living enjoyed 12 months ago, according to MGM Advantage, the retirement income specialist.

Jeremy Cook, chief economist at the foreign exchange company, World First, said: "Lower inflation will be good news for Mark Carney given the inflationary caveats to their forward guidance plan, to the man on the street, who are seeing wage increases at only 1%, this still means that life and spending decisions remain tough, and in reality, talk of a recovery remains merely talk."

In order to earn a real rate of return on cash, basic rate tax payers would have to find a savings account paying 3.38%, and higher rate tax payers would have to find an account paying 4.5%. There is just one savings bond that delivers for basic rate tax payers – the Skipton Online Limited Edition 7 Year Fixed Rate Bond paying 3.5%. There is no account for higher rate earners.

The only option is to utilise a cash ISA which is exempt from income tax and therefore the rate simply needs to match or better inflation at 2.7% for capital preservation. There are six accounts which deliver this.

One bit of good news is that all of the accounts that offer a real rate of return also accept transfers of previous years' ISA allowances in - meaning that the whole of your tax efficient savings can be protected from the erosive effect of inflation. 

Susan Hannums from SavingsChampion.co.uk said that of the six it is only the fixed rate accounts that are available to all - as the First Direct rate is dropping from November and the City of Derry is local only - and they have both have set very high minimum deposits.

Source: SavingsChampion.co.uk

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Emma Wall  is former Senior International Editor for Morningstar

© Copyright 2024 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Modern Slavery Statement        Cookie Settings        Disclosures