Rate cut leaves investors more exposed to inflation

IT HAS been a nail-biting week for savers, as they watched high-profile banks crashing, wiping out a lifetime of thrift. And while interest rate cuts have been welcomed by borrowers, they are thin gruel for those saving for retirement or already relying on their savings to live.

Money continued to pump from bank to bank, not in a search for the best rate, but a safe place.

More than 2.3 million savers switched money between accounts, according to research from Abbey. Yet nearly one in 10 savers still has more than the £50,000 guaranteed by the Financial Services Compensation Scheme (FSCS) with one organisation.

Reza Attar-Zadeh, director of savings at Abbey, said: "We have seen a marked increase in savings inflows, up 270% in our branch network alone."

But savers are also the losers from last week's base rate cut, which left the rate lower than that of inflation for the first time since 1981. Investors rely on interest paid to their accounts to at least protect them from inflation, so the current environment is particularly hard for those close to or in retirement.

Defaqto, the financial research house, calculates that of the 449 instant access savings rates on the market, not a single one pays out a good enough rate for a higher-rate taxpayer to make a 'real' return on their savings. Just one in 10 accounts is generous enough for basic-rate taxpayers to see a return on their investment.

And the position is likely to deteriorate markedly over coming months.

Although National Savings & Investments is the only organisation to announce lower returns to savers so far, banks and building societies say their rates are under review.

Overall, returns to savers will be cut by at least as much as – and possibly more than – lenders hand back to borrowers. Some investors may see even larger reductions in interest, so it is vital to keep an eye on announcements to have a chance of fighting inflation.

Now is a good moment to lock into fixed rates before they are withdrawn. The best fixed deals include RBS's two-year bond paying 6.6%, and the Co-op's two and three-year bond paying 6.59%. Anglo Irish is paying 7% over two years, but should anything go wrong, you will be left relying on the Irish government's deposit guarantee.

A poll commissioned by Channel 4 News revealed that almost half of those questioned feel their savings are less safe than a year ago and only 6% feel financially secure, reflecting a massive decline in confidence.

National Savings, which has seen a massive inflow of funds in recent weeks due to its Government guarantee, has been the first to act by cutting the number of Premium Bond prizes while reducing the interest rate on the fund from 3.4% to 3.25%. Elsewhere it has cut returns by 0.2%.

This leaves its cash Isa paying 4.4%, Income Bonds paying 4.25% or 4.5% above £25,000 and the Easy Access account from 1.65% to 4.2%.

Scots are dipping into their savings just to live, according to research from Lloyds TSB. While one in three say they have changed their spending habits in the last six months and cut back on spending, half of those questioned say they are also saving less. Scottish savers have the smallest nest eggs, typically stashing away £9,939 compared with £12,703 in the rest of the UK.