Savers should ask themselves why they are staying in cash

The Bank of England's decision to switch 70pc of its staff pension fund into index-linked gilts was a heavy hint about what to expect.

By Ian Cowie
Published: 7:55AM GMT 22 Jan 2010

It's a daunting thought that inflation would halve the purchasing power of money during the time many people now spend in retirement if it remains at the higher levels announced this week.


Worse still, no less an authority than the Governor of the Bank of England forecasts that inflation will continue to rise, when this month's increase in Value Added Tax (VAT) has its inevitable effect on prices.

While the nominal figures themselves look like pretty small beer to anyone who can remember the 1970s, this insidious disease of money remains a real threat to savers – who, let's remember, outnumber borrowers by six to one.

Pensioners and others who rely heavily on savings and have no scope to earn their way out of this fiscal black hole are the most vulnerable of all.

If the Consumer Prices Index (CPI) were to remain at its new level of 2.9pc – compared to 1.9pc a month before – it would take less than 25 years for you to need £2 to buy what £1 buys today.

While some comfort can be drawn from the fact that the Retail Prices Index (RPI) is running at only 2.4pc per year, this measure of inflation is rising even more rapidly than the CPI; having jumped from only 0.3pc.

None of this will come as any surprise to regular readers. As pointed out in this space several times last year, the Government's policy of "quantitative easing" was bound to boost inflation – as printing money has always done in the past.

The Bank of England's decision to switch 70pc of its staff pension fund into index-linked gilts was another heavy hint about what to expect.

Looking forward, fixed-return bonds and deposits seem set to disappoint savers by repaying them with paper that buys less than their original capital.

Anyone keen to preserve purchasing power over the medium to long term should consider shares and share-based funds, particularly while the FTSE 100 index of Britain's biggest stocks is yielding an average of 3.3pc net of basic rate tax.

The only argument for delaying a move out of deposits – where the average instant access account pays just 0.75pc gross – is that share prices may be lower, and yields higher, after the General Election. 

http://www.telegraph.co.uk/finance/personalfinance/comment/iancowie/7050204/Savers-should-ask-themselves-why-they-are-staying-in-cash.html