The Bank of England ate my savings! Beating inflation in a muted market

The Momentum UK Team 22 March 2013

Another month, another set of economic figures to depress savers further. The Consumer Price Index rose 0.1% to 2.8% in February, according to the ONS.

It may not sound a lot, but for savers it could be a big blow for everyone hoping to make a real return on their cash savings. The immediate effect was to cut the number of tax free ISAs matching or beating inflation from 14 to just ten.

As the Bank of England recently suggested that inflation will stay above its target 2% for a few more years yet, it may not be wise to expect a miraculous recovery in real returns (interest rate minus inflation) at any time soon. In fact, inflation may yet climb higher before it begins to fall. The Bank of England will not be raising interest rates either for fear of choking off any minuscule signs of economic recovery. The savings outlook is as grim as ever - but at least UK savers don’t face the bailout tax horrors being imposed on bank customers in Cyprus.

Here in the UK, the inflation hike, prompted by higher fuel bills, reinforces the message that savers need to shop around for the best rates more than ever. They are not helped by the fact that banks are hardly falling over themselves to tempt us with juicy offers to pile into before the end of the tax year in April.

This year's ISA season has been especially muted. We suspect that banks and building societies are stocking up on cheap money under the Funding for Lending scheme, so they have less need to compete for savers' cash. Deals are few and far between and existing account rates are being steadily cut.

There are some accounts available that will pay more than inflation, if you shop around and switch. You can earn over 3% if you are prepared to lock your money away in a fixed rate ISA for two years or more. And First Direct pays 3% instant access on larger balances of £40,000 or more. Transferring from existing accounts elsewhere may be a sensible idea. These offers don’t hang around for long. To take advantage of savers will need to move quickly, rather than waiting for the 5th April tax year deadline.

ISA switching is relatively easy if savers follow the golden rule. Never, never close an existing ISA account nor withdraw cash from an account you already have if you want to keep the tax benefits of that part of your allowance.

To keep your tax-free status, you need to approach your new ISA provider and ask them to transfer money in from your old account or accounts. Keep a copy of all paperwork and a note of any calls or conversations. Transfers should go through without a hitch but they can take a little time. But don't let that put you off, any boost to your savings rates may be worth chasing.