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 February 2010 is 0.74% down from 0.8% in the previous month. At this rate a 40% tax payer ends up with a real return of 0.44% and a 20% tax payer 0.59%.
Let’s think about this for a minute. A couple of days ago I gave the example of the reckless person who mortgaged up heavily, then spent all their money on depreciating items and finally managed to get themselves sacked from their job. This strategy managed to secure them an annual ‘income’ of £72,301 through house price increases and government mortgage handouts.
Now instead let’s look at Average Joe who is much more prudent than this and instead of borrowing decides to keep his 20% deposit (£33,560) in an instant access account as an emergency fund just in case he loses his job or has some other unforeseen emergency costs. He’s rewarded with annual interest on his savings of £248 but of course he has to pay his 40% tax on this giving him a return after tax of £149. He now has a pot of £33,560+£149=£33,709. Unfortunately though inflation stays at the current rate for the next year meaning his pot now only has the purchasing power of £32,273 meaning he’s heading backwards for being prudent and taking responsibility for his own actions.
If you’re prepared to lock your money up for any period less than 2 years the savings rates are getting worse month on month for locking your money up. 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 1.06% down from 1.1% last month. Similarly, the olive line is the same but for >1 year but <= 2 years and is achieving 3.59% down from 3.67%. Finally the purple line is >2 years and is today achieving 4.15%% up from 3.83%.
I still maintain that the banks, government and the Bank of England don’t want people to save. The Bank of England certainly doesn’t as it has maintained its Official Bank Rate at 0.5% while inflation is now 4.4%. The banks don’t care. They can just borrow from the Bank of England overnight at the Official Bank Rate of 0.5% and buy 10 year UK government bonds yielding 4.05% or if they want a bit more return they lend to the general public.
Even though I’m being discouraged I’m continuing to save hard into cash and remain focused on my retirement investing today strategy. I did however just recently move significant amounts of money from an instant access savings account to buy National Savings and Investments (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 1.06%. The difference though is though that the Index Linked Savings Certificates are not taxed where the savings account is plus they add the retail prices index onto that 1% return.
As always DYOR.
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