2011 wasn't a great year for savers. The historically low Bank of England base rate, held at 0.5% since March 2009, has meant that saving account interest rates have come crashing down and meant that many savers may have found themselves losing out in real terms.
There was a time when if you had a lump sum in capital you could put it in any one of a wide range of savings accounts, sit back and watch it grow, but not anymore.
Why does the Bank of England base rate affect my savings?
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The Bank of England base rate is the interest rate at which it will lend to financial institutions. This in turn influences the interest rates offered by those financial institutions themselves, to both borrowers and savers alike.
The Bank of England sets its base rate at a particular level in order to try to influence spending. A lower rate of interest will discourage saving and encourage spending and borrowing which the Bank hopes will kick-start the economy after the slump.
But at least my money will be earning, whatever the rate, right?
Any rate of interest may be better than no interest, but in real terms you could actually be losing money. How so? One word: Inflation.
Inflation is the measures the cost of living across time, taking into account the price of goods and services. Rising inflation will reduce the spending power of a unit of currency. The rate of inflation across recent months has been unusually high, and well above interest rates offered by the banks, meaning that saving are often losing value in real terms.
Is there any way to get my money working for me?
It's a tough one. High inflation and a low base rate do make life more difficult for savers, there's no doubt about that, but there may be some ways in which savers can hope to keep up with inflation, and even possibly get their savings earning a little to.
First things first: Keep shopping around for the right savings option. Don't let you money languish, in tough times it takes a little more work to get your savings earning. Some high street banks offer special fixed period deals and it's a good idea to make full use of these, moving your money between accounts accordingly. If you can make a commitment for a certain time period, sacrificing easy access, you can also often get a better deal. Some high street lenders do still offer inflation beating rates.
By putting your money into a tax-free wrapper such as an Individual Savings Account (ISA) you can protect you capital from Uk Income Tax and Capital Gains Tax giving you potentially higher returns on your money.
You might also want to consider some slightly more risky options for your savings such as investing in bonds or other types of low risk investment in pursuit of higher returns. Before venturing into investment you should be fully aware of any risks that may be involved.
Will the situation get better?
Some analysts forecast that the Bank of England base rate will remain the same until at least 2015. Inflation is more difficult to predict but is likely to remain fairly high throughout 2012, in the meantime make use of the available resources, even if it takes a little extra time out of your day.
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