Thursday, 25 February 2010

A home for cash

UK Retail Prices Inflation (RPI) is currently running at 3.7%. This means that if you are a UK basic rate taxpayer that to just stand still you need to be earning interest of 4.63%. It’s even worse for higher rate taxpayers, you need to be earning 6.17%.

So what’s available out there? A quick look at MoneySavingExpert shows that the best ‘clean’ account, which is one that plays no tricks like introductory bonuses or withdrawal penalties, is paying interest of 2.5%.

This means that even with this account the basic rate taxpayer is every year is losing 3.7% - 2.5% + 2.5% x 20% tax = 1.7% of purchasing power on their cash holdings and the higher rate taxpayer is losing 3.7% - 2.5% + 2.5% x 40% tax = 2.7%. So if you are a prudent saver you are being punished while if you are in debt up to the eyeballs your debt is gradually being eroded by the wonderful [sic] inflation that we are seeing. This is thanks to the Bank of England base rate of 0.5% plus the great management that the government is showing.

I’ve protected myself as well as I can by having a significant portion (17.6% of total assets) of the low risk (cash and bonds) portion of my current low charge portfolio in NS&I Index Linked Savings Certificates which is giving me a real positive return. Unfortunately a new Issue of these has not been offered for some time and so I can’t put any more money here.

A little over 3% of my cash is sitting offshore in a ‘clean’ account paying interest of 4.25%. I’m losing money in real terms daily however at least it’s better than the best UK ‘clean’ account rate of 2.5%.

The remainder is in a ‘clean’ UK based account paying 2.1% interest. This is losing significant purchasing power however I feel powerless to do anything about it. I see no option at the moment but to sit tight and hope that one day my prudence is rewarded. Does anyone have a better option?

As always DYOR.


  1. hold you cash in a different currency where bank rates are better? For example Australia fixed interest rates up to 6% if you can open an account there (I can, so perhaps not a great example). You probably need a GBP to AUD view on this (I know the theory says purchasing power parity should have the exchange rate negate any interest changes... but i understand the whole concept of the carry trade is that in practise this doesnt neccesarily happen).

    Or, alternatively, is the GBP the best currency to be holding. I wish I knew...

  2. p.s. any change of putting a comments RSS feed in place? (to compliment the posts RSS feed?)

  3. Richard

    Thanks for the comments.

    Yes, I agree with you in principle and I am also in te same sitaution with your "I wish I knew..." The pound is now so weak that exchange rates are poor based on recent history. With my current level of knowledge I would be gambling by moving to another currency as I don't have enough data to make an educated assessment of whether the current rate can move much lower or whether the next direction is up.

    Currency movements could very quickly eat up the interest rate differences.

    I did manage to get some cash into a foreign currency (AUD as you mentioned) before the pound was devalued but my high savings rate per month creates cash flow quite quickly.

    I'm not overly computer literate so I'm not sure if I can add a comments RSS feed on blogger? Do you know how to do it?

  4. hi there... well it seems you are actually already publishing it!

    Blogger comes standard with a posts and comments feed.

    I can see you have the posts feed redirected to feedburner. If you go to Blogger, settings, site feeds, advanced... then you see the comments feed option. But probably no need now as it is already on:

    It is just not redirected to feedburner which doesnt matter from my view.

    So it is already sorted :)

  5. For working out inflation over the year, would I take the mean of each month's inflation?

    I think the current situation is ridiculous. Those who caused this debt driven recession seem to be the only ones who are benefiting from it.

  6. Hi Richard
    Great. You wouldn't believe how long it took me to get the blog set up plus all associated paraphernalia :-) I'm glad it's all sorted automatically.

  7. Hi Lewis

    The method I use to work out annual inflations is to actually go to the data sets themselves on the Office for National Statistics website. For example I use the dataset CHAW for the RPI that I present on the blog. Let me now give an example to calculate the %. In Jan 10 the index is showing as 217.9 and in Jan 09 the index is showing as 210.1. So (217.9-210.1)/210.1=3.7% as I showed here Hope that clarifies.

    Of course the other way is to come to RetirementInvestingToday where each month I'll show the annualised 3, 6 and 12 month RPI figures :-)

    One thing I learnt recently is to be careful of means as I detailed here

    With reference to the 'current situation is ridiculous'. I couldn't agree more.

  8. Remember that RPI is averaged. You have a personal RPI, based on your own basket of goods. If you're buying cabbages every day and never buy Wii games, maybe your personal RPI is less than you think.

    There's a personal RPI calculator floating about on t'Internet, from ONS. I could never get it working on my PC, but worth a poke about if you're interested.