How Higher Inflation is Robbing Savers of Their Nest Eggs

Inflation is fast becoming a concern for UK savers. In 2013 the Government will be raised value added tax (VAT) from 17.5 percent to 20.0 percent. This, along with rising energy prices is likely to help push inflation up.

Inflation is the name given to the rise in cost of goods and services over time. In short, how much the pound in your pocket is worth today and what it might be worth in the future.

Who Keeps an Eye on Inflation?

The Bank of England is responsible for keeping inflation at manageable levels, which usually means between 1.0 and 3.0 percent. Lately they have been finding this job increasingly difficult.

In fact, the Consumer Prices Index, the main measure of inflation has been at a level of 3.0 percent or above for most of the year so far. As a result, the Bank of England’s governor, Mervyn King has had to write regular letters to the Chancellor to explain that inflation is at worryingly high levels.

The Erosion of Nest Eggs Through Inflation

So what does this have to do with savers? Well firstly it means that the rate of interest they are earning on their money is less than impressive. Most regular deposit accounts are now offering savers an interest rate of between 0.5 percent and 1.0 percent. With inflation at 4.0 percent this means that their money is actually losing its value, and will be worth less in the future.

For a UK saver to keep up with the rate of inflation they would need to find a savings account paying between 4.0 percent and 5.5 percent, just to keep their money at the same level it is at now.

Are There Any Ways to Beat Inflation?

So what can savers do to keep their money safe from the erosive dangers of inflation? Sadly there are no instant access savings accounts that are currently paying a level that will beat inflation. This means that basic rate tax-payers will need to consider locking away their money for a few years, without access, in order to get a better rate of return.

For example, ISA savers can get a long-term ISA savings account from a few providers that will pay an interest rate of 5.5 percent, provided they agree to keep the cash tied up for three to five years.

Savers need to remember however, that savings rates can change over time, and there is no guarantee that the interest rate you receive when you open the account will remain the same over the period you sign up for.

So can we expect interest rates to rise in the future? There’s a good chance that the Bank of England will begin to push interest rates higher than current levels sometime during early 2011, although how high they go will depend on the strength of the UK economy.

Savers who are sitting on large piles of cash should start think about how to make their savings work harder to fight inflation. If not, perhaps it is time to begin looking at the different savings products available in the market.