Where to find an inflation beating savings account

16th April 2014


Just one-in-five savings accounts pay enough interest to negate the effect of inflation after the Consumer Prices Index (CPI) fell to 1.6% in March writes Kara Gammell.

This is the third consecutive month inflation has undershot the Bank of England’s 2% target, and has now almost halved from a peak of 2.9% last June.

However, the rate cut is a mixed blessing for savers – while lower inflation means that your capital is eroded more slowly than before, it reduces the likelihood of deposit rates increasing. This adds up to grim news for savers as figures from Moneyfacts.co.uk reveal that just 159 out of 816 savings accounts beat inflation.

According to the website, a basic-rate taxpayer at 20% needs to find a savings account paying 2% per a year, while those paying tax at 40% will need an account paying at least 2.66%.

And while there are 612 non-Isa accounts available on the market, only 71 negate the effects of tax and inflation. It is only a slightly better story with Isas, with 88 accounts out of the 204 on offer cancelling it out.

The effect of inflation on savings means that £10,000 invested five years ago, allowing for average interest and tax at 20%, would have the spending power of just £8,859 today – a fall of 11.41%.

“While it is good news that inflation has fallen – adding fuel to the prospect of pay increases outstripping the cost of living – the same cannot be said of savings rates,” says Sylvia Waycott, spokesman at Moneyfacts.co.uk.

According website, the average rates of easy access accounts available for new customers have fallen from 0.77% last year to 0.63% today.

What’s more, a fixed bond today will give you a much lower return of interest compared to twelve months ago where the average two-year fixed-rate bond paid 2.07%, compared to 1.71% today.

Fixed-rate Isas have also fallen considerably. For instance, the best rate for a one-year fixed-rate Isa is now just 1.65% and comes from Tesco Bank, which is down from the rate of 2.1% offered by Skipton Building Society last April.

While the average interest paid across the Isa range is just 1.59% and a year ago it was 1.82%.

One big reason for these falling rates is the Funding for Lending Scheme (FLS), which is eroding the value of savings.

The scheme, which was launched in July 2012 but was refocused earlier this year on business lending alone, initially aimed help provide cheaper loans and mortgages to both individuals and businesses. Banks and building societies have been given access to cheap money from the Bank of England on the condition that they then lend this on at competitive rates.

But while FLS has had the desired effect with mortgage and personal loan rates falling, savers are paying the price due to paltry interest rates as lenders became less reliant on attracting savers’ deposits. This is true even if FLS has now been focused on business lending alone. Unfortunately banks and building societies need to attract less money from savers so offer less competitive rates.

“The negative effects of FLS are still very much with us and showing no signs of abating soon,” says Ms Waycott.

So where should savers look for the most competitive rates?

Taxpayers on the hunt for a best-buy variable-rate cash Isa should consider Islamic Bank of Britain’s Notice Cash Isa, which pays 1.81%. This Shariah-compliant account requires a minimum deposit of £250 and can be operated online, in branch, by post or over the phone. Savers must provide 120-days’ notice before withdrawing funds, unless transferring your Isa balance to another provider. In this case, no notice is required, but you will be subject to a loss of interest. To find out more visit islamic-bank.com or call 0845 145 1200.

Also worth a look are Stafford Railway Building Society’s Cash Isa (srbs.co.uk or 01785 223212) and Hinckley & Rugby Building Society’s 120-day Notice Cash Isa Issue 2 (hrbs.co.uk or 0800 434 6343), both of which pay 1.75% on minimum deposits of £250 and £500 respectively.

For savers who are looking to fix their cash Isa rate, Skipton Building Society’s Online Five-year Fixed-Rate Isa tops the best buy table with a rate of 3%. This account requires a minimum deposit of £500, accepts transfers in and can only be operated online. However, early access to funds is only granted on closure of the account and you will be subject to 240-day loss of interest. For further details, visit skipton.co.uk or telephone 0845 850 1722.

While Newcastle Building Society’s Fixed-Rate Option Isa (Issue 100) is worth a look as it pays 2.75%. Here, savers must have a minimum deposit of £500, transfers of existing funds are accepted and this account can be opened and operated in branch, by post or online. Bear in mind that while withdrawals and transfers out are permitted, you will be subject to 180-days’ loss of interest penalty. For addition information, visit newcastle.co.uk or dial 0845 600 4368.

Those looking to beat inflation and tax with a standard fixed-rate account, could choose First Save’s Seven-year Fixed-Rate Bond 1st Issue (firstsave.co.uk or 0845 601 2211), which pays 3.5% while Secure Trust Bank’s Fixed-Rate Bond 7 Year Term (Series 5) pays 3.4%. To open an account, visit securetrustbank.com or call 0121 683 6424.

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