Rising real returns as interest rates fall

Savers have suffered in recent months as the tumbling base rate has meant a sharp fall in savings’ rates.

However, falling inflation may offer some relief. Personal finance website moneyfacts.co.uk has found that real returns from some cash accounts are rising in spite of the cuts in interest rates. The reason this can happen is that the rate of inflation has declined which improves the buying power of cash.

Mike Warburton, from accountants Grant Thornton, said: “In the same way that an increase in inflation destroys people’s savings, a fall in inflation boosts savers’ buying power.”

The news will come as a relief to many pensioners who have seen the income from their savings eroded in the last few months.

With December’s retail price inflation of 0.9% and an account interest rate of 2.23%, the equivalent rate would be 0.88% for a basic rate taxpayer, according to moneyfacts.co.uk. December was the first month that this figure has been positive for nearly five years.

An one-year fixed bond paying 4.48% would be worth 2.69% in real terms to a basic rate taxpayer using December’s figures.

It is a strange situation when falling interest rates are resulting in higher returns, but it’s a strange financial world we live in today.

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