The Bank of England base rate has been set at 0.50% for over 4 years now, and shows no sign of changing in the next few years as the Governor of the Bank of England has said interest rates will not increase until unemployment falls to 7%. According to the Governor, this is unlikely to occur until 2017.
Inflation is making life hard for savers, as the Retail Price Index (RPI) hovers around 3.3%; this means a basic rate tax payer needs to earn a gross rate of interest of 4.125% for savings to simply stand still in terms of purchasing power.
To illustrate the real effects of low interest rates and high inflation, look at the example below which shows how the value of your savings could be eroded:
If you held £50,000 on deposit over the next 3 years, the purchasing power of this capital would be reduced down to £48,203.
This assumes an average interest rate of 2.5% gross, being a basic rate tax payer and that inflation averages 3% per annum over the next 3 years.
For many clients it is important to hold cash on deposit to cover planned capital expenditure such as holidays and replacing cars as well as holding money for emergencies; however it is more important now than ever to consider how much you hold on deposit as the real value is being eroded.
We can access a number of alternative savings solutions to help you manage both your long and short term needs with the aim of preserving and growing your capital. If you would like to review your savings strategy, please contact one of our consultants.