Blow for savers seeking inflation-busting returns

Savers desperate to stop their money being eroded by inflation and tax have just one option left following the jump in inflation . With CPI at 3.7%, basic rate taxpayers need to earn 4.625% gross on their savings to exceed the combination of basic rate tax and inflation. Only one account – a Coventry building society bond fixed for five years at 4.75% – does this, but Andrew Hagger of comparison website moneynet.co.uk said he wouldn't consider locking his money away for that length of time when interest rates are likely to rise. Although some banks offer regular savings accounts which pay much higher rates of interest – HSBC and First Direct pay 10% and 8% respectively – you are limited in how much you can pay into them. "It's no good for someone with a lump sum that they are relying on to produce an income," Haggar said. The accounts are also only available to customers who have current accounts with these banks. Higher rate tax payers need to earn 6.17% gross, and apart from the regular savings accounts there are no products that will meet or exceed this rate. Their best option is to use any disposable income to reduce any outstanding debt, starting with the most expensive first, according to Hagger. The Office for National Statistics attributed the 0.4% rise in CPI from November to December to increases in air fares, petrol and diesel, and gas prices, as well as food costs which rose by 1.6% – the largest ever rise for that period. The biggest increases were for vegetables, bread and cereals, milk, cheese and eggs. Homeowners with mortgages have to beat the RPI index, which includes house prices and mortgage interest. It rose slightly from 4.7% to 4.8%. The ONS said RPI experienced downwards pressure from falling house prices. Hagger said: "There seems little prospect of inflation easing in the near future on the back of soaring fuel costs, and at this rate CPI will soon be double the government's inflation target of 2%. Pressure is building for an interest rate rise, and the sharp rise in the CPI figure will hopefully make those in power sit up and take notice. "Savers have been hammered by the government's low interest rate strategy, whilst some mortgage customers have enjoyed far lower demands on their budgets. With swap rates starting to rise, and with it some fixed mortgage rates, perhaps the tide is starting to turn." 'Impact worsens with age' Older people have been particularly hard hit by the combination of low interest rates and big price increases for gas. Age UK Enterprises' Silver RPI index , which was developed to show the rate of inflation experienced by older people, indicates that people aged 55 and above have suffered a real RPI rate of between 1.8% and 4.1% more than the ONS headline rate – the older they are, the higher the rate. Age UK said the primary reason for the big difference has been the fall in mortgage interest rates, which has had less effect on those in later life who are less likely to carry mortgage debt. This means overall costs for those in later life have not reduced as greatly as for the population as a whole. At the same time they have faced increases on items where they spend proportionally more, such as utilities. Gordon Morris, managing director of Age UK Enterprises, said: "The impact of inflation on over-55s has been substantially underestimated and it worsens as you age, with over-75s experiencing cost rises on average 4% above official measures. For a typical over 60-year-old it means they are on average more than £620 a year worse off than previously thought."