Savings rates matching/beating inflation calculation?

TobyB_2

Can someone help me with the mathematics?

I occasionally read/hear statements along the lines of "you'd need 6.5% as a basic rate tax payer and 8.5% as a higher rate payer to meet inflation ..." - the actual numbers vary, it's the principle. I know the higher tax rate is 40%, I've read that the CPI for instance is 5.2% - but can't work it out. How do these calculations work?

Cheers

Richard_Cocks

Well, if you're taxed at 40%, you only get 60% of the gross rate.

So to get an effective 5.2% net you'd need to be getting interest such that 60% of it was 5.2%.

So just divide 5.2/0.6 = 8.67%

ziggyzaggy

On this page http://www.moneysavingexpert.com/savings/best-regular-savings-accounts#regular you could use the rate of inflation you want to use in the 'Enter cash ISA rate' box and will perform the calculation for you. I'm guessing it does what the previous poster said.

dag_2

To be honest, my opinion is that you shouldn't worry about whether savings accounts beat inflation or not. If inflation is very high, and the table-topping savings account with the best interest rate still doesn't beat inflation, it doesn't change the fact that the table-topping account would still be the best savings account to put your money in.

I think the whole point of comparing savings rates to inflation is to make you think about whether holding savings in a particular currency (for example, UK sterling) is really a good idea, and whether it wouldn't be better to invest your money in, say, shares, or property, or another currency, or gold.

But even if the interest rates do beat inflation, it doesn't change the fact that you might still get a bigger return on a different type of investment than you would with cash savings.

Then again - you might not. There's risks with everything. The government might guarantee to repay your savings in the event that the bank that holds it goes bust, but no government guarantee can guard savings against the risk that the currency might collapse, thereby making the savings totally worthless. And whether or not your savings interest rate currently beats the inflation rate or not, that risk of currency collapse still exists.