MSE News: Inflation rise means all savings are 'losing' accounts

Milarky

Before I read Guy's article I want to place on record my view that we should not blithely adopt CPI as the representative inflation index. Remember last year, when RPI was the unrepresentative figure - not the govt's preferred figure - but the media kept shooting out the fiction that we were 'in deflation' then?

Right, I'm off to see if Guy talks about '4.7%' being the figure to beat or not.....

I'm back.

As the interest on most savings, other than cash Isas, is taxed, a basic rate payer needs to earn 5.88% before the deduction to beat the current RPI figure, while a higher rate taxpayer must earn 7.83%

Well, that bit at least is the correct slant.

But other thing these stories all slip up on is talking about current inflation and current savings rates in the same breath. As we know, inflation is a backward measure and interest rates are a snap in time - but only look forward. The 4.7% needs to be compared with (say) 1 year, 2 year (etc) bond rates from this time last year (and more complicated comparisons like 2 year, 3 year (etc) bonds from Dec 2008. That is: what inflation has done vs rates available at best lock-in rates becomes the measure of interest [no pun]/topic of discussion. We would then also need to average RPI over 2 years (which can still be done), 3 years etc

Examples:

Best rate from Dec 2009 was about 4% for 1 year - so -0.7% for ZR, -1.5% for BR and -2.3% for HR taxpayers
Best rate (2yr) from Dec 2008 was about 6% [I'm guessing that one] RPI 3%/4.7%, so +3%/+1.3% for ZR, +1.8%/+0.1% for BR & +0.6%/-1.1% for HR taxpayers

Yes, I'm sorry to say it but knowing whether you would have suffered loss of wealth due to inflation requires a patient, long term approach - not the stuff of catchy headlines.

JamesU

I thought the 15% VAT was increased back to 17.5% at the beginning of Jan 2010. If so, unless I have the timing of %RPI calculations wrong, the start of the impact of the VAT back at 17.5% on inflation would not be seen until the Jan 2011 figures which are published in Feb 2011.

Similarly, the effect of a VAT increase to 20% on RPI inflation will not be seen until Feb 2012 if the 20% VAT rate is introduced at the beginning Jan 2011.

JamesU

Linton

JamesU wrote: »

I thought the 15% VAT was increased back to 17.5% at the beginning of Jan 2010. If so, unless I have the timing of %RPI calculations wrong, the start of the impact of the VAT back at 17.5% on inflation would not be seen until the Jan 2011 figures which are published in Feb 2011.

Similarly, the effect of a VAT increase to 20% on RPI inflation will not be seen until Feb 2012 if the 20% VAT rate is introduced at the beginning Jan 2011.

JamesU

err - the published inflation figures are the change in 12 months. Therefore the 17.5% change would be included from Feb 2010 (based on jans figures) and will last until Jan2011. Similarly, but a year later, for the 2011 change.

JamesU

Linton wrote: »

err - the published inflation figures are the change in 12 months. Therefore the 17.5% change would be included from Feb 2010 (based on jans figures) and will last until Jan2011. Similarly, but a year later, for the 2011 change.

(i) This months %RPI = 4.7% refers to month of Nov 09 relative to month of Nov 10, and published one month later in Dec 10.
(ii) VAT went back to 17.5% in Jan 10.
(iii) Impact of increased VAT to 17.5% on RPI is in Jan 10 but that month has not yet been included in any monthly % RPI calculation.
(iv) Earliest you can see the impact of VAT back at 17.5% is Jan 10 RPI relative to Jan 11 RPI to give % RPI for that period.
(v) That % RPI comes out one month later in Feb 2011.

JamesU

opinions4u

SallySunshine wrote: »

Hopefully the base rate will rise in the New Year but not enough to 'save' our savings

Of course a change in base rate does not automatically mean a change in savings rates.

however this has made my day

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8200211/Ireland-blocks-Allied-Irish-Banks-from-paying-40m-bonuses.html

Why can't this happen with some of our banks in the U.K.

I don't think the article states who was going to benefit from the bonuses that will no longer be paid in Ireland.

If it's the blokes at the top who over exposed the organisation, that's all well and good. But the majority of bank branch staff in Ireland and the UK earn significantly LESS than the average wage.

So while you worry about CHAPS fees and the rate of interest on your significant lump sum with Nat West, some hard working individuals were told that they would get a bonus of, perhaps, 5% of their realtively low wage if they achieved certain goals within their job. They've had that taken away from them.

And if anyone states that old chestnut about we'll lose these wonderful people to other countries if we don't pay them their 'worth', they want to be thankful they are not being sacked or sued.

And of course Mrs O'Reilley, the part-time cashier from the Cork branch, won't be able to take her kids to a caravan park for a week next year.

There is a big difference between a multi-million pound award for a toff at the top, and the reality that for those at the bottom a bonus is basically something that makes a staff member's salary slightly more acceptable.

Linton

JamesU wrote: »

I could be wrong, getting confused myself now, but is this not correct:

(i) This months %RPI = 4.7% refers to month of Nov 09 relative to month of Nov 10, and published one month later in Dec 10.
(ii) VAT went back to 17.5% in Jan 10.
(iii) Impact of increased VAT to 17.5% on RPI is in Jan 10 but that month has not yet been included in any monthly % RPI calculation.
(iv) Earliest you can see the impact of VAT back at 17.5% is Jan 10 RPI relative to Jan 11 RPI to give % RPI for that period.
(v) That % RPI comes out one month later in Feb 2011.

JamesU

Oh dear - try again. Lets assume that there is no inflation apart from a step rise in the cost of goods of 5% in the middle of Jan 2010 so goods which cost £1 on 1/1/10 and before cost £1.05 on 31/1/10 and after.

Jan 2010's RPI change (1Jan09-31Dec09) -0%
Feb 2010's RPI change (1Feb09-31Jan10) - 5%
Mar 2010's RPI change (1Mar09-28Feb10) - 5%
......
.....
Dec 2010's RPI change (1Dec09-30Nov10) - 5%
Jan 2011's RPI change (1Jan10-31Dec10) - 5%
Feb 2011's RPI change (1Feb10-31Jan11) - 0%
Mar 2011's RPI change (1Mar10-28Feb11) - 0%

This is the problem with the headline RPI figure. it is fine for continuous changes but misleading for step changes. In the above example people would be complaining that the inflation rate hadnt gone down for a whole year whereas in fact there were no changes in prices during 11 months of that year (ie no inflation).

[Deleted User]

I have savings that I'm using to subsidise my income over the next 20 years or so until I retire. So low interest rates are obviously not good for me.

Yet I'm not overly concerned by low interest rates *at this time*.

The way I see it I have two choices:

1. Sit tight and hope that interest rates go up soon (or inflation down).
2. Invest my money elsewhere in the hope of getting a greater return.

In recent years my savings have increased due to greater-than-inflation-rate-interest. I can afford the odd loosing year before my spending power is less than it was when I first put my money in the bank. If I take a long-term view I'm still 'winning'.

I could take a gamble and switch to investments. After all, even if the worst happens I can afford to sit tight and give my investment a chance to recover. But in that worst-case-scenario my money is locked in for years (with no guarantee of even recovering it's initial value) and I won't be free to take advantage of any good opportunities that might come along in the future. I'd be kicking myself if great interest rates were just around the corner and I'd slashed my capital in half by gambling with investments.

The country is in a bad state. Who knows what's ahead. At least with savings your capital is safe and you can pull your money out any time you choose. I'll be sticking with savings for the time being and keeping track of exactly how much I'm loosing.

I'm not sure how bad things would need to get with savings before I'd be willing to risk my capital with investments. This would be the case at any time, but particularly in the current climate.

pqrdef

Linton wrote: »

In the above example people would be complaining that the inflation rate hadnt gone down for a whole year whereas in fact there were no changes in prices during 11 months of that year (ie no inflation).

And then there's a miracle in Feb 2011 when inflation suddenly comes down from 5% to 0.

How convenient that the VAT increase next month, coming 12 months after a similar increase, will have negligible impact on the headline percentage.

pqrdef

Deleted_User wrote: »

In recent years my savings have increased due to greater-than-inflation-rate-interest. I can afford the odd loosing year before my spending power is less than it was when I first put my money in the bank. If I take a long-term view I'm still 'winning'.

Fine, if you don't mind spending all your capital and you only want the interest to maintain the spending power.

Conventionally though people have expected to maintain the real value of their capital and get an income from it on top of that.

Linton

Deleted_User wrote: »

I have savings that I'm using to subsidise my income over the next 20 years or so until I retire. So low interest rates are obviously not good for me.

Yet I'm not overly concerned by low interest rates *at this time*.

The way I see it I have two choices:

1. Sit tight and hope that interest rates go up soon (or inflation down).
2. Invest my money elsewhere in the hope of getting a greater return.

In recent years my savings have increased due to greater-than-inflation-rate-interest. I can afford the odd loosing year before my spending power is less than it was when I first put my money in the bank. If I take a long-term view I'm still 'winning'.

I could take a gamble and switch to investments. After all, even if the worst happens I can afford to sit tight and give my investment a chance to recover. But in that worst-case-scenario my money is locked in for years (with no guarantee of even recovering it's initial value) and I won't be free to take advantage of any good opportunities that might come along in the future. I'd be kicking myself if great interest rates were just around the corner and I'd slashed my capital in half by gambling with investments.

The country is in a bad state. Who knows what's ahead. At least with savings your capital is safe and you can pull your money out any time you choose. I'll be sticking with savings for the time being and keeping track of exactly how much I'm loosing.

I'm not sure how bad things would need to get with savings before I'd be willing to risk my capital with investments. This would be the case at any time, but particularly in the current climate.

You have risks however you play it - either that the savings return isnt enough to fund your desired lifestyle, or that investments do not go as well as you would like.

You are looking for paying for 20 years income. That means that half of the current lump sum wont be needed for another 10 years - long enough for a properly managed range of investments to have a very good chance of delivering.

How about each year putting the funds for 3 years time each year in a fixed rate savings account. Then put half your funds in investments, with the help of an IFA if you are not confident about doing that yourself.