Inflation at 2.7%, why do savings need 3.8% to beat it?

grandplonker

I read the following on BBC News (from whom I garner mathmatically defying percentages of my written material) today:

With Consumer Prices Index (CPI) inflation currently running at 2.7%, savers are struggling, and failing, to protect the value of their money.

To match inflation, a basic rate taxpayer needs to find an account paying 3.38%, while those on a higher rate need a rate of at least 4.5%.

How does that work? Shouldn't 2.8% reward on savings beat 2.7% inflation? What has your income tax rate to do with it?

Practical example would be gratefully appreciated.

markwilkinson

You will pay tax on your savings interest, unless held within an ISA, that's why the tax rate is an important consideration and also why a savings rate of 2.8% won't keep pace with inflation of 2.7%.

JoeCrystal

No problem

As you pay 20% tax as basic and 40% tax as higher rate

80% of 3.38% is 2.7% and 60% of 4.5% is 2.7%

Cheers,
Joe

grandplonker

Ah, that makes more sense. I'm not lucky enough to have to pay HM government 40%. In that case, the performance of my investments are far more important than I thought. Rather than making money I've been... mitigating the effects of inflation.

markwilkinson

You and many, many others I would imagine. Hardly any of the people I work with have understood the effect inflation has on their savings.

Still, all is not lost! Now you can plan for a way forward.

Glen_Clark

There is another factor.
Politicians have now drawn up 2 different rates of inflation;
RPI - the higher one they use to calculate their own index linked pensions.
CPI - the lower one they use for us

Glen_Clark

markwilkinson wrote: »

You and many, many others I would imagine. Hardly any of the people I work with have understood the effect inflation has on their savings.

Still, all is not lost! Now you can plan for a way forward.

Absolutely. Inflation is the stealthiest stealth tax there is. And it quietly takes from the poor to give to the rich. Osborne is hooked on it like a junkie on heroin.

notbritishgas

Glen_Clark wrote: »

There is another factor.
Politicians have now drawn up 2 different rates of inflation;
RPI - the higher one they use to calculate their own index linked pensions.
CPI - the lower one they use for us

I notice that CPI has reduced but RPI has gone up.
Is it coincidence or me being cynical that we are now approaching Septembers CPI figures which are used for a lot of pension increases next April. Has a trend been started.

prowla

Does anybody believe the published inflation figures?

patientperson

notbritishgas wrote: »

I notice that CPI has reduced but RPI has gone up.
Is it coincidence or me being cynical that we are now approaching Septembers CPI figures which are used for a lot of pension increases next April. Has a trend been started.

I reckon that you are right in your assumption.

patientperson

prowla wrote: »

Does anybody believe the published inflation figures?

No .. apart from Carney and Osborne