Investors' confusion sees savings lose money

Confusion among investors means that most people are actually losing money on their savings, according to new research by AA Savings.

10:03 26 October 2004

Confusion among investors means that most people are actually losing money on their savings, according to new research by AA Savings.

When inflation is taken into account - coupled with the fact that income from interest is liable to tax (at 20 per cent for basic rate taxpayers and 40 per cent for higher rate taxpayers) - savers must earn a minimum of 2.38 per cent on their savings account for the amount of money in an account to stay still in real terms.

Higher rate tax payers have to earn more than 3.17 per cent for their savings not to lose value in real terms.

"If people understood this better, they would be more likely to make sure they get the best return for their savings," said Lloyd East, director of AA Savings.

The AA points to the fact that more than three out of every four people with a savings account does not know what AER (Annual Equivalent Rate - used to express what interest rate is paid on savings) stands for.

Additionally more than half of consumers could not work out how much interest they would earn from 100 in a year with an AER of three per cent, after they had been told what AER stands for.

Somewhat worryingly the youngest age group, 18 to 24-year-olds, were 20 per cent less likely to get the figure correct (3) than the average of the population.

"This survey shows an alarming lack of financial literacy among savers and it seems to be particularly true of young people," Mr East noted.

"Plain language and a straightforward account are vital if savers are to make informed choices that will give them the best returns," he added.

The AA also discovered that despite 68 per cent of savers saying they would move savings accounts if they believed they were receiving a poor rate of interest, a massive 61 per cent said they do not know what interest they were currently earning.