You may not think it possible but it is actually the case that you can now lose money in a savings account! But how, surely your money is safe? The answer is yes, of course your money is physically save. The loss actually occurs in a far more unobvious way.

It’s all to do with the current rate of inflation. According to the Bank of England on July 16^th 2008 this stood at 4.4%. But simply this means that something costing £1.00 this year will cost £1.04 next year. Therefore when you take into account the falling value of money, and the taxation you pay on your interest, your savings rates can look a lot less attractive. In some cases you are actually going backwards.

For example if you invest £1000 in a savings account at 5% for 1 year. Your interest at the end of the year will be £50 gross. Minus 20% for a basic rate tax payer (or 40% if you're a higher rate tax payer) and your net final figure is £40. Meanwhile, if you compare how much your savings have reduced in value during this year due to inflation (currently at 4.4%) and alarmingly its £44.

This effectively means that after a whole years saving £1000 at 5% you are £4 worse off! It is therefore vitally important that your savings are in a savings account that pays above 5%AER. If you have any funds that are in account earning less than this you will be losing money.

The good news is that there is plenty of savings accounts available paying over 5%AER. In fact you can now get accounts up to 6.55%AER (Kaupthing Edge) with instant access. Or, if you don’t mind not having instant access to your cash for a year, you can get a massive 7.20%AER with ICICI.