Following a horrendous decade for savers, it’s easy to think that things are now far better.
After all, the days of accounts paying tiny interest rates seem to be behind us ‒ the top easy access account today pays 4.55%, a rate that would have seemed unthinkable a year ago.
And if you opt to lock your money away for a year you could get 6.15%, a better rate than is even available on longer-term bonds.
Yet as rates have gone up, the reality is that savers are in an even worse position than in previous years of rock-bottom rates.
Will savers ever catch a break?
Improving interest rates
For years, the interest rates paid on savings deals have languished in the doldrums.
It’s been difficult to get too excited when the highest rates around have barely passed 2%.
That’s not exactly helped when it’s come to motivation to get into the savings habit, and may well have played a part in so many Brits having only modest sums ‒ if anything ‒ set aside for a rainy day.
Yet on the face of it, things have changed substantially in recent months.
Bank Base Rate back in December 2021 was at a record low of 0.1%, yet the Bank of England has hiked it repeatedly to its current level of 5%, its highest level since the financial crash.
And with those increases, so too have the interest rates paid on savings accounts risen.
Indeed, we haven’t had savings accounts delivering such returns in years.
It’s certainly easier to feel excited about an easy access account paying above 4%, as you can nab now, rather than the sub-1% rates which had become the norm.
Savers are up against it
And yet the truth is that savers remain in an incredibly tough position.
It all comes down to inflation, and the rate at which the price we pay for goods has increased.
While a high headline rate is always a selling point when it comes to savings, ultimately the big question is always how that interest rate compares to inflation.
You need to find an account that pays an inflation-beating return, otherwise, the value of your pot will gradually erode over time, even if it increases in cash terms.
And that has become far more difficult.
For example, back in October 2020, the Consumer Prices Index measure of inflation stood at 0.7%.
As a result, you only needed to have an account paying a higher rate of inflation in order to ensure that the value of your pot was increasing in real terms, and according to Moneyfacts you had around 227 different accounts from which to choose.
The situation is rather different today. While inflation has fallen from its peak of above 11% last year, the fall has been slow.
Indeed it’s precisely because of how persistent inflation has been that the Bank of England has opted to repeatedly hike Bank Base Rate.
Yet with inflation still sitting at 7.9%, the reality is that there is not a single savings account of any form that is inflation-beating.
Realistically your best chance of beating that is if you happen to win a big prize on the Premium Bonds.
Sure, the rates on savings deals are better than we’ve had in years, but for some time savers ‒ even those who shop around for the very best deals ‒ have had little option but to accept their savings pot shrinking in value in real terms.
Does saving have to be taxing?
There’s also the small matter of tax, which far more of us are having to pay on our savings pots.
Most of us benefit from a Personal Savings Allowance, which as the name suggests sets out how much you can earn in interest each year without having to hand a slice over to the taxman.
The allowance stands at £1,000 for basic rate taxpayers, £500 for higher rate taxpayers and nothing for additional rate taxpayers.
It wasn’t much of a concern in recent years, given the mediocre rates of interest on offer.
But as rates have grown, it means far more of us ‒ even those with relatively modest savings pots ‒ may have to pay tax on our interest.
Analysis by AJ Bell suggests that around 1.8 million taxpayers will have had to pay tax on savings interest in the 2022-23 tax year, giving HMRC a £3.4 billion boost.
That tax take is set to rocket next year according to the research, to an eye-watering £6.6 billion, with far more savers caught out.
In other words, not only is the interest on our savings accounts failing to keep pace with inflation, but we are also losing some of the interest earned in tax payments too.
Given the stretched public finances, I wouldn’t hold my breath that this is something the Government plans to address in the foreseeable future either.
Does the future look brighter?
Getting the rate of inflation down is preoccupying not only the Bank of England but the Government too.
Prime Minister Rishi Sunak made halving the rate of inflation one of his five key pledges at the start of the year, and it’s fair to say it hasn’t gone quite as smoothly as he would have hoped.
The Bank of England has a 2% target for inflation, and while it’s unrealistic to expect it to hit that level for some time, inflation does at least appear to be slowing.
The fact that it has been so ‘sticky’ only increases the likelihood of further Bank Base Rate hikes to come as well, which means that in the months ahead it may not be quite such an impossible task to find a savings account that beats inflation.
That may be the best that savers can hope for, given the big economic challenges that lay ahead.