Savings rates to beat inflation

Piggy bank

News that the rate of inflation jumped last month has come as a double blow to savers, who are already having to contend with low returns on their cash.

The latest figures show there was a shock jump in the official rate of inflation in December, from 1.9% the previous month to 2.9%. This is the largest jump in the annual rate since records began in 1997.

Inflation now stands at a nine-month high, pushed up by the unfavourable base effects resulting from the temporary VAT rate of 15% and oil prices falling sharply in December 2008. Lower levels of discounting by retailers last month compared with a year ago also contributed to the rise.

Inflation is bad news for savers as it effectively erodes the real value of your money.

Taking the current rate of inflation into account, a basic-rate taxpayer now needs to find a savings account that pays at least 3.63% in interest to stop their savings pot eroding away, according to date provider Moneyfacts.

Higher-rate taxpayers, meanwhile, needs to find an account that pays at least 4.81%.

However, savings rates look to have hit rock bottom, with the average instant access account paying around 0.75%. Shockingly, after tax and inflation, the average return on an instant access account is minus 2.3%.

Darren Cook, spokesman for Moneyfacts, says: “This is extremely unfair for those savers who have made prudent or astute decisions in the past and are being hit by low savings rates and spiralling inflation.”

Sadly, even market-leading instant access accounts provide little protection from inflation - according to Moneyfacts, there are currently no variable-rate accounts paying interest above 3.63%.

The first home for your cash savings should always be a cash ISA - anyone over the age of 16 can save £3,600 this tax year in a cash ISA, rising to £5,100 for people aged 50 or over.

The benefit of cash ISAs is that your money will grow free of tax.

However, average rates on tax-efficient cash ISAs offer little protection from the erosive impact of rising inflation. The average interest rate on a variable ISA is currently just 1.31%. On a £3,600 balance, this means savers will only earn £8.72 in interest, rising to £12.34 for savers over the age of 50.

While fixed-rate ISAs offer slightly better rates, the average return on a one-year account is still just 2.7% – equal to £14.76 annual interest on a £3,600 balance. Older savers able to put up to £5,100 in a cash ISA this tax year will still only earn £20.91 a year on average.


“The current low-interest rate landscape is really hurting savers with inflation wiping out the spending power of their cash, and even when you opt for the tax free option that the government encourages us to take advantage of, the returns are still quite pitiful,” says Andrew Hagger, spokesman for comparison website Moneynet.

Moneywise's pick of the top cash ISAs

Inflation-busting savings accounts

If you've already used your ISA allowance, then a fixed-rate account is the next best place for your money at the moment, as rates are more generous than instant access deals.

However, bear in mind that you won't be able to access your money during the term of the account - this can range from 12 months to five years. You're also unlikely to be allowed to put additional money into your account beyond the initial deposit.

Provider AER Term Deposit
Birmingham Midshires 5.1% Five years £1
The AA Savings 5.1% Five years £500
Birmingham Midshires 5% Four years £1
Nationwide 4.5% Three years £1
ICICI Bank 4.25% Two years £1,000
Firstsave 3.65% One year £1,000


More top savings accounts


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