Britain’s embattled savers can help themselves

Times are tough for those with investment-but shopping around could pay dividends

Three years after millions of savers fell victim to a slow-motion bank robbery, alarm bells are ringing at Westminster. MPS on the Treasury Select Committee have noticed that freezing interest rates far below the rate at which inflation is eroding the real value of money robs savers and pensioners of the reward they are entitled to expect for their prudence. None of this will be news to readers of The Daily Telegraph, which has been reporting the problem for more than two years now. However, it is encouraging that MPS seem keen to hold policymakers at the Bank of England to account for the unintended consequences of their actions.

Put simply, bank and building society deposits are paying interest and repaying capital with cash that has less purchasing power than the money savers originally paid in. With inflation rising at 3.6 per cent a year (RPI), most people need a return of 4.5 per cent before basic rate tax just to preserve the real value of their savings. Needless to say, no such returns are available on plain vanilla bank or building society accounts. Since the Bank froze its base rate at a historic low of 0.5 per cent some 37 months ago, the average high street savings account return has shrunk to 1.05 per cent.

Pensioners have been hit particularly hard by the unintended consequences of another policy: quantitative easing (QE), where the Bank buys bonds issued by the Government, known as gilts. These are used by insurance companies to provide the underlying returns from annuities – a form of guaranteed income for life – purchased by many people when they retire. In a vicious seesaw effect, extra demand for gilts from the Bank has pushed up the price of bonds, forcing down their yield, or the income pensioners can obtain with their savings. Annuity yields have fallen by 18 per cent during the past three years, cutting the annual income a 65-year-old man can obtain on £100,000 of savings from £7,300 a year before tax in 2009 to £6,000 now.

So savers are paying a high price for the Bank’s strategy of maintaining negative real interest rates in an effort to prevent the credit crunch turning into a slump. But it is unrealistic for the MPS on the select committee to talk of compensation, because it would be impossible to assess individual entitlements after offsetting factors are taken into account. For example, most pension funds hold some gilts, and so have gained in capital terms from increased prices, even if the income they produce has fallen. Similarly, savers have benefited from the bank bail-out. And keeping the cost of money low has kept thousands of over-indebted firms in business and their employees in work – as well as enabling tens of thousands of over-mortgaged homebuyers to retain the roof over their heads.

Not that the Government is a disinterested observer of these events. As the biggest borrower in Britain, it is the main beneficiary of inflation’s tendency to transfer wealth from savers to debtors – and QE ensures it can still borrow cheaply, by boosting the price of the gilts it sells. George Osborne may have few fans outside his immediate household, following the Budget, but maintaining the confidence of international money markets and avoiding double-digit interest rates may come to be seen as his greatest achievement. Despite the UK’S deficit running at levels near those of spendthrift Greece, Britain’s indebted government, businesses and homebuyers continue to be able to borrow at rates not far above those of thrifty Germany. It is not hard to see how calamitous a sharp increase in interest rates could be. During the last housing slump, when mortgage rates hit 15 per cent in 1991, amid soaring unemployment, lenders repossessed 78,000 properties, an average of 1,500 homes a week. There was a lot of human suffering in those dry statistics.

So what can be done to ease the plight of savers today? First, bank and building society depositors can help themselves by voting with their cash for higher returns. There is a big gap between the best and worst deposit rates, but many high street banks profit from customer inertia – people who can’t be bothered to close rotten accounts. Second, savers able to accept a degree of risk can consider investing in shares or bonds. For example, the FTSE 100 currently yields 3.5 per cent net of basic rate tax – by coincidence, precisely the sum most people need to match inflation. Many bonds yield double that. (Of course, stock market investments can fall without warning.) Third, the Government could help savers unable to accept the risks of stock markets by suspending income tax on deposit-based savings, effectively bringing all bank and building society accounts into line with those held in Isas, which do not need to be declared for tax.

The cost of this new tax break for savers would be some £2.7 billion a year. That’s a substantial amount, but a small percentage of the £153 billion raised in income tax last year. Bearing in mind that savers outnumber borrowers by six to one, this might be a price the Chancellor is prepared to pay to provide some good news in his Autumn Statement.