ISA Rates

An announcement went out last week to warn a large number of savers that their money was losing real value. Several billion pounds are believed to be losing value in normal savings accounts due to the high level of inflation.

It is now impossible for any top level taxpayer to gain any return on a normal savings account, but even lower tax brackets are suffering. Even cash ISAs can't overcome inflation, with 35% of the tax free funds losing money.

This is easily traced to the RPI (retail prices index). This figure rose to 5% in the reports in July. Any high-range tax payer needs to have an 8.33% gross return on their account, while basic-rate taxpayers need a 6.25% gain. Since the best savings plan offers a 7.2% gross return, anyone in the higher tax bracket has to use ISAs or just spend the money.

Basic-rate payers may face this situation soon. Only 14% (about 278 of 1,980) of available savings accounts in all categories have payouts higher than 6.25% on a balance of £10,000. Removing all the introductory bonuses drops it to only 13% of accounts. The standard household favorites are some of the worst too. Only 25% of these good accounts could be found at a high-street bank. Halifax offered a top account at 6% while HSBC only offered 2.47%. Anyone investing in these accounts would only lose money. Building societies offer the best rates, with 46% on this list.

This also couldn't have come at a worse time. Cash savings are at a record high as many investors just wanted to get out of the increasingly risky stock market at the start of this year. £6.2 billion flowed into the bank in the first half of 2008. That amounts to a 60% increase from the £3.8 billion total in the first six months of 2007.

Even the good savings accounts aren't going to be perfect for many. 223 of the 278 accounts that beat inflation, roughly 80%, locked the investor into the account for a fixed amount of time or restricted their ability to alter their original savings account. For example, India's ICICI Bank has the best rate on the list at 7.2%. Their Hisave bond requires a £1,000 minimum which is locked for the full year. National Counties' 7.11% bond and First Save's 7.1% bond also require a year's commitment. Not being able to withdraw one's funds makes these impractical for many.

Other accounts don't have a time lock, but do have similar restraints. Chelsea building society offers 8% for a basic savings account. This high sum includes their 3% introductory bonus in the first year which decreases to 2% in the second year and 1% in the third year. Also, any saver investing in their account has to put in the same amount each month with a £500,000 cap. Heritable Bank has a less restrictive plan at 6.6%, but they still require 60 days advance notice for any withdraw and the 0.6% introductory bonus wears off in a year.

This means that the only real hope are ISAs. £3,600 can be put in these tax-free accounts each year, but even 34.6% of these are losing money to inflation. Only 153 of the 234 pay over 5%, with the best at 6.5% through Market Harborough. Principality follows with 6.37%. Unfortunately, both of these plans require a minimum of £3,600.

Things certainly don't look good. The CPI (consumer prices index) is also at it's 16-year high with a record rise of 0.6% in July alone. This accompanied the surprising rise in RPI to 5%. Thankfully, the increase is expected to be short-term. The Bank of England predicts a peak CPI at 5% which will then fall quickly as food and fuel prices cease to rise while the economy stalls. This would mean a possible rate cut by the end of this year, which would be welcome relief to many homeowners.

In light of this announcement, some experts claim that this is a good time to grab an inflation-beating fixed account to lock in a high rate before the upcoming cuts. The window is closing though, as more and more high rate bonds are removed from the market.