Are taxpaying savers all losers?

Mr_Mumble

The February RPI inflation number was: 4.6%. This is the highest recorded RPI figure since 1991 when the base rate was more than double the current 5.25%!

Icesave only yields 4.56% after tax for basic rate taxpayers (5.7*0.8).

With three rate rises (total of +0.75%) since August savers may think they're getting a good deal at the moment. In reality savers are losing more and more money as RPI shoots into the stratosphere:

RPI in February 2006: 2.4%
RPI in February 2007: 4.6% = a 2.2% increase

So in the real world (where people pay council tax and have mortgage repayments!) savers are worse off by 1.45% (-2.2% + 0.75%) compared to this time last year.

But it gets worse: most saving accounts were reduced by 0.25% in the 1st quarter of 2006 despite the Bank of England not cutting the base rate. We were told at the time this was a reaction to money market rates. Oddly enough, a year later, an increase in money market rates hasn't led to an increase above and beyond the base rate rises...

So, imho, taxpayers should only use deposit accounts for cashflow and emergency purposes. Non-taxpayers who utilise regular saving accounts can increase their wealth by keeping their money in the high street bank but everyone else is getting screwed!

bristolleedsfan

Mr_Mumble wrote: »

The February RPI inflation number was: 4.6%. This is the highest recorded RPI figure since 1991 when the base rate was more than double the current 5.25%!

Icesave only yields 4.56% after tax for basic rate taxpayers (5.7*0.8).

With three rate rises (total of +0.75%) since August savers may think they're getting a good deal at the moment. In reality savers are losing more and more money as RPI shoots into the stratosphere:

RPI in February 2006: 2.4%
RPI in February 2007: 4.6% = a 2.2% increase

So in the real world (where people pay council tax and have mortgage repayments!) savers are worse off by 1.45% (-2.2% + 0.75%) compared to this time last year.

But it gets worse: most saving accounts were reduced by 0.25% in the 1st quarter of 2006 despite the Bank of England not cutting the base rate. We were told at the time this was a reaction to money market rates. Oddly enough, a year later, an increase in money market rates hasn't led to an increase above and beyond the base rate rises...

So, imho, taxpayers should only use deposit accounts for cashflow and emergency purposes. Non-taxpayers who utilise regular saving accounts can increase their wealth by keeping their money in the high street bank but everyone else is getting screwed!

u are absolutely correct and in addition very few if any people will get pay rises of anything like 4.6% and benefits wont go up 4.6% either in addition RRI only includes certain items...eg haircuts can go up10% and pcs ( which are 1 off buys) can fall 30%..so inflation on things people buy regulary or pay reg ( like council tax) can be more than 4.6% . i did read that base rates need to go up to 8% to halt house price increases there is a reluctunce on part of bank of england not to increase base rates to much otherwise millions will go bust....

taxpayers have also lost out through abolition of tessas and introduction of isas as tessas paid excellent rates with them being long term accounts whereas cash isas are short term accounts ( instant access/30 day/1 year fixed) and pay awfull rates of interest compared with tessas

StevieJ

Mr_Mumble wrote: »

The February RPI inflation number was: 4.6%. This is the highest recorded RPI figure since 1991 when the base rate was more than double the current 5.25%!

Icesave only yields 4.56% after tax for basic rate taxpayers (5.7*0.8).

With three rate rises (total of +0.75%) since August savers may think they're getting a good deal at the moment. In reality savers are losing more and more money as RPI shoots into the stratosphere:

RPI in February 2006: 2.4%
RPI in February 2007: 4.6% = a 2.2% increase

So in the real world (where people pay council tax and have mortgage repayments!) savers are worse off by 1.45% (-2.2% + 0.75%) compared to this time last year.

But it gets worse: most saving accounts were reduced by 0.25% in the 1st quarter of 2006 despite the Bank of England not cutting the base rate. We were told at the time this was a reaction to money market rates. Oddly enough, a year later, an increase in money market rates hasn't led to an increase above and beyond the base rate rises...

So, imho, taxpayers should only use deposit accounts for cashflow and emergency purposes. Non-taxpayers who utilise regular saving accounts can increase their wealth by keeping their money in the high street bank but everyone else is getting screwed!

One answer.

http://www.nsandi.com/products/ilsc/index.jsp

This must be the only savings product where currently their web site understates the returns ( they have not updated the blurb to cover the increase today).

Stonk

Not so! Here's why:

The main reason RPI differs from CPI (or whatever they call the one the BoE uses these days) is because the former includes the effect of mortgage interest.

Savers should not have mortgages. If you have both a mortgage and savings, you should be paying off the mortgage, not saving.

Therefore, the inflation measure that is relevant to (sensible) savers is actually CPI which, at 2.8% is entirely possible to beat after tax in a deposit account.

Mr_Mumble

Stonk, CPI excludes far more than just mortgage interest. You still have to pay council tax if you've paid off your mortgage! Handily for the government CPI doesn't include that inflation busting tax...

RPIX, the measure for RPI minus mortgage interest payments has also risen drastically over the last year.

RPIX in February 2006 = 2.3%
RPIX in February 2007 = 3.7%

So the "normal" saver without mortgage is still worse off to the tune of 0.65% (+0.75% -1.4%) compared to a year ago (assuming their savings rate has tracked base rate).

This is all oversimplified, of course. A large demographic without mortgages and with large amounts of savings are the retired and elderly on fixed incomes. Alliance Trust released a press release today showing inflation for the over-75s is currently 4.5%. That is far closer to RPI than RPIX or CPI.


PS: RPIX was the inflation index that the Bank of England had to follow a few years back. Under the RPIX measure Mervyn King would have had to write to Gordon Brown in December and February explaining why inflation had gotten out of control (RPIX > 3.5). This CPI figure is awfully convenient in not embarrassing government and hiding real inflation!

EdInvestor

Isn't the inflation figure forecast to drop quite soon due to lower energy prices?

bristolleedsfan

EdInvestor wrote: »

Isn't the inflation figure forecast to drop quite soon due to lower energy prices?

just to refresh our memories how much in percentage terms have energy prices gone up :rolleyes:

RayWolfe

Do you not know that they are presently coming down, or do you not know how annual inflation is calculated?

tomstickland

Savers should not have mortgages. If you have both a mortgage and savings, you should be paying off the mortgage, not saving.

Not when savings rates outstrip the mortgage rate, as in my case. It doesn't matter what inflation does if I save money to pay of mortgage lump sums in the future; my savings are growing at slightly higher rate than the debt.

Stonk

Mr_Mumble wrote:

Stonk, CPI excludes far more than just mortgage interest. You still have to pay council tax if you've paid off your mortgage! Handily for the government CPI doesn't include that inflation busting tax...

Hmm, I didn't know it excluded Council Tax. You're right, RPIX is better. Even then, though, at RPIX = 3.7%, a taxpayer (standard-rate, at least) can protect against RPIX-inflation. Higher-rate taxpayers, probably not.

I think I partly misunderstood the intention of the original post. I certainly accept that savers are worse off now than they were a year ago, because inflation has increased faster than savings rates. I was writing only about the suggestion (in "savers are losing more and more money") that it is not possible to keep up with inflation using a deposit account. We're not actually losing money yet, we're just gaining less than we used to.

We can argue until the cows come home about whether the various inflation measures are an accurate picture of reality, but that's a different discussion. Personally, 3.7% feels about right for me. For any inflation measure, everybody could point to some of their own outgoings which have increased by more, but equally they could find some which has increased by less, or decreased - it's just that those ones don't remain so firmly in the memory! To enter a discussion like this, you have to accept as a baseline that the various measures are computed accurately within their defined scope, and that the question is which measure has the appropriate scope. It seems to me that the scope of RPIX is the one most closely relevant to savers.

The Governor still has to write to Gordon Brown if CPI exceeds 3.0%. He escaped very narrowly a couple of months ago.

tomstickland wrote:

Not when savings rates outstrip the mortgage rate, as in my case.

Well, yes. You are in a lucky small minority! Either you have a fantastic mortgage deal (in which case, well done), or you aren't a taxpayer (in which case, you can easily protect your savings from all 3 inflation measures).

tomstickland

Yes, I have a good mortgage deal. I was lucky, I got a fix just before the rates started going up.