Cost of living increases

Savers and pensions suffer as inflation rises

Money - own picInflation rose from 0.5% to 0.6% last month, adding to the cost of imports and the cost of living.

The rise is unlikely to prompt any change of policy from the Bank of England, but it will erode the value of savings as the rate edges towards the rate of interest paid on many accounts. Pension deficits are also likely to worsen.

Moneyfacts says that rate reductions in the savings market have now outweighed rate rises for ten consecutive months. 

In July, Moneyfacts recorded 16 savings rate rises. “Disappointingly, rate reductions over the same period completely outshone this figure, with the number of rate decreases standing at a staggering 154, with some deals falling by as much as 1%,” it says.

Charlotte Nelson, Finance Expert at Moneyfacts, said saver seeing some of the best deals being withdrawn altogether, with 16 top ten deals withdrawn in July.

“The effect of these rates cuts means that savers are facing all-time lows once again. For example, the average two-year fixed rate bond has fallen from 1.78% to 1.22% in just one year and the average easy access ISA has fallen by 1.11% to 0.90% in the same period.

“Two years ago the top paying easy access account paid 1.5%, but today’s saver will need to fix for a whole year to achieve that rate. With providers no longer needing savers’ funds, the life of the cash saver has just got even harder, so anyone looking to get a decent return on their savings will need to act fast and soon.”

 Gareth Shaw, head of consumer affairs at Saga Investment Services, said: “The slight increase in the Consumer Prices Index spells more bad news for savers, as inflation creeps towards the average return on savings accounts. In a month’s time, savers could well be losing money in real terms.

“The Bank of England’s data show that the average return on a cash ISA now sits at 0.65%, meaning that savers are making next to nothing in in deposit accounts. And the struggle to get a decent return from cash is getting harder, with popular interest-paying current accounts beginning to offer less attractive rates.

“People should be looking at other ways to make their money work harder. The yield on the FTSE 100, for example, is currently around 3.7%, and a steady transition from cash to stocks and shares has the potential to transform the returns that can be achieved. Many savers may be reluctant to put their capital at risk, but sticking steadfastly to cash in the current environment could do them a great deal of harm.”

Selling media space for DBCalum Bennie, savings expert at Scottish Friendly said: “July’s rise in inflation is likely to herald further rises in the cost of living as the price of imports increase following the fall in the pound post Brexit. 

“Clearly this is not good news for the pound in peoples’ pockets and makes life even more difficult for those looking to save for their financial future.  

“We can expect a clearer view of the effects of Brexit on the economy over the next few months. In the meantime, with interest rates remaining low, stocks and shares ISAs provide an attractive alternative to cash savings, although risk is attached.”

Charles Cowling, director, JLT Employee Benefits, said: “The July rise in inflation heaps further woes on pension schemes that had already seen their deficits soar post Brexit as a result of the latest round of QE and falls in interest rates.

“With pension benefits being linked to inflation, deficits will likely worsen further, adding pressure on trustees and companies alike.

“Whether or not Brexit is good for the UK economy, it has certainly been calamitous so far for pension schemes which were already suffering massively in markets which have been extremely difficult. This latest news must increase the likelihood of the Brexit effect bringing down some companies and their pension schemes.”

Russ Mould, investment director at AJ Bell, said:At 0.6% UK inflation remains miles below the Bank of England’s 2% target. As such, the Bank of England is likely to push ahead with the three-part monetary stimulus programme, with the prospect of further interest rate cuts a possibility. 

“However, seven years of record-low rates and quantitative easing suggest the policy has been a failure so far, questioning whether ‘more of the same; is a suitable response now. 

“This is the first full month’s figures following sterling’s decline in the wake of the EU referendum result and the slight increase in inflation may give some hint of what a weak pound could mean going forward.”

Liz Cameron, Chief Executive of Scottish Chambers of Commerce, said: “Although inflation has nudged up slightly in the last month, it remains well below the Government target of 2%.  In the wake of the weakened value of the pound in the wake of the EU referendum vote, we would expect some upward pressure on inflation to emerge in the coming months as a result of the rising cost of imported goods.”  

David Lamb, head of dealing at Fexco Corporate Payments,  said: “Most marketwatchers predict that more expensive imports will drive up prices steadily this year. But with CPI so far adrift of the Bank of England’s 2% inflation target, no-one expects rising inflation to prompt the Bank to reassess monetary policy any time soon.”

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