Wednesday, 21 July 2010

Positive real savings rates are impossible to find - Average UK savings interest rates – July 2010 Update

If you’re a UK saver it remains pretty ugly out there. According to Money saving Expert the top clean rate account pays 2.6% AER however it allows only one penalty free withdrawal a year. That doesn’t sound overly clean to me. If you want unlimited access then you’re looking at 2.5%. With the RPI at 5.0% today, every month you hold your money in one of these accounts you are seeing its purchasing ability eroded.

Looking at the average saving rates, as shown in today’s chart, it gets decidedly worse.

Firstly, the red line which is defined by the Bank of England as the monthly average of UK resident banks sterling weighted average interest rate, interest bearing sight deposits from households not seasonally adjusted. As with previous reviews of this data set I’m interpreting that as current accounts and instant access savings accounts. The average rate being paid as of May 2010 is 0.76% down from 0.77% in the previous month. At this rate a 40% tax payer ends up with a real return of 0.48% and a 20% tax payer 0.64%.

If you’re prepared to lock your money up for any period less than 2 years the savings rates on average are getting worse month on month. The blue line is the monthly average of UK resident banks sterling weighted average interest rates for new time deposits with a fixed original maturity of <=1 year from households not seasonally adjusted and is today achieving 1.43% down from 1.51%. Similarly, the olive line is the same but for >1 year but <= 2 years and is achieving 3.19% up slightly from 3.17%. Finally the purple line is >2 years and is today achieving 3.48% down from 3.79% last month.

Even though I’m being discouraged to save in cash I continue to target an emergency fund of 6 months earnings in an instant access savings account. You just never know when you might become ill, lose your job or require cash for some other emergency. The rest of my lower risk investments I have a small amount in Index linked Gilts and the majority in NS&I Index Linked Savings Certificates. From what I can see this seems sensible given that even if inflation turns negative as long as I hold for a year I can get a 1% return compared to the average <=1 year savings account return of 0.48% (as I’m a 40% tax payer).

As always do your own research.

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