Savers Should Be Celebrating Real Returns of Up to 2.4%

Written by Karen Bryan

pink piggybankI’m sick of reading headlines about hard pressed savers suffering low rates of interest.

In my opinion, most media outlets and savers in the UK are too focused on the headline rate of interest paid on savings accounts. They should be looking at the real return (when the rate of interest paid after tax is higher than the rate of inflation) on their savings. It’s not only the monetary value of your savings that counts, it’s also what they can buy you, i.e. their spending power.

Of course, the size of the real return will depend on whether you use the Consumer Price Index (CPI), or the generally higher Retail Price Index (RPI).

In July 2015, CPI was announced as 0% for the previous year ending 30 June 2015, RPI was 1%.

I have the bulk of my instant access savings in a Santander 123 Current Account that pays a variable gross rate of 3%, which equates to 2.4% after deduction of basic rate income tax.

If I use the CPI rate of 0%, then my real return on this account over the last year is 2.4%.

If I use the higher RPI rate of 1%, then my real return on this account over the last year is 1.4%.

The bulk of my Cash ISA savings are in a Santander 123 Two Year Fixed Rate ISA (due to mature on 1 July 2016), paying a tax-free rate of 2.3%.

If I use the CPI rate of 0%, then my real return on this account over the last year is 2.3%.

If I use the higher RPI rate of 1%, then my real return on this account over the last year is 1.3%.

Let’s say CPI increases to 2% in 18 months time and the rate paid on the Santander 123 Current Account increases to 3.25%, then my real rate of return drops to 0.6%. Therefore, although the headline rate of interest has increased, my real return has fallen, due to the larger increase in the rate of inflation, than in the rate of interest paid.

So savers, don’t bank on the rates of interest on your savings increasing for a better return, your savings could do better if inflation stays low.