- 3.2% AER variable with Santander. Forget to switch in 12 months to the new highest rate bank and this becomes 0.5%.
- 3.17% AER with the Post Office. Forget about this one and in 12 months you’re at 1.65%.
- 3.1% AER with the Nottingham Building Society. This one works a bit differently. If you close the account before the 30 September 2013 you only get 1% and after this date you also only get 1%.
Of course banks like Santander, rely on the vast majority of the Average Joe’s and Jane’s out there forgetting to switch after 12 months, at which point you’re quickly penalised. Let’s say you start one of these savings accounts but then get distracted and only remember to switch to the new best offering in 15 months. That 3.2% which looked ok has now become effectively 2.7%. Leave it 18 months and you’re now at an effective rate of 2.3%.
The alternative is to go for a no nonsense savings account. Today, again according to Money Saving Expert, that looks to be 2.75% variable with Aldermore (as long you have a balance over £1,000). So, stay with Santander for 15 months and you are worse off than this account.
If you’re saving into one of these types of account let us now look at what is really happening to your savings. Let’s use the most bullish savings interest rate of 3.2% to give the most positive spin. Firstly, if you’re a UK basic rate taxpayer the government takes its tax cut leaving you with 2.56% and if you’re a UK higher rate taxpayer it’s even worse news with you only retaining 1.92%.
Then you must consider the devaluation of your savings through inflation. Let’s assume the Retail Prices Index stays at its current year on year change of 3.46%. This would result in the basic taxpayers savings buying 0.9% less than they would have had you spent your savings today. As higher rate tax payer you’re worse off with the ability to buy 1.54% less than today in 12 months.
We must then remember that these are the best accounts out there and even with those you are going backwards. My chart today shows what is happening to the Average Joe. The good news is that while it’s in extremely slow motion there does seem to be an upward shift in average savings accounts. Interest bearing site sight deposits from households (the red line) have risen to 1.02% from a low of 0.71% in August 2009. Let’s think about Average Joe for a minute. He’s a basic rate taxpayer meaning his sterling savings will buy 2.6% less than today in only a year.
So what is the Retirement Investing Today portfolio doing about low risk savings/investments? Firstly, I do hold a small amount of cash held within the UK (less than 5% of my total net worth) earning derisory savings interest. This is effectively my Emergency Fund and it is currently earning 2.1%. I could move to Aldermore for 2.75% but it really would make very little difference to my net worth. Instead of savings accounts the majority of my low risk investments are instead held as follows:
- NS&I Index Linked Savings Certificates. Regular readers will now I am a big fan of these however unfortunately they are currently not on sale. While they were on sale I backed the truck up and so now hold about 20% of my total portfolio in them. I estimate that today they are yielding 4.2% tax free. This at least means instead of going backwards these funds are increasing at the rate of 0.74% in real terms.
- I hold some cash in offshore accounts currently earning 4%, meaning I am getting more than the best UK rate. Of course this account comes with a wealth warning associated with currency exchange rates. It is possible that if the exchange rate goes against me I would lose purchasing power when priced in Sterling.
- Finally, I hold index linked gilts both in ISA and SIPP wrappers.
As always DYOR.