The new savings account that beats inflation

Before tax, this new savings account beats inflation, but don't let the first two words put you off.

The cost of living is running high. The most comprehensive measure of rising prices is the Retail Prices Index, which is calculated by the Office for National Statistics and represents the whole basket of goods that we typically buy, including housing costs.

The latest figure from it shows inflation has been 5.1% over the past 12 months, while the Consumer Prince Index was 4%, double above the Bank of England's target.

Here's how the best savings interest rates compare to that:

Best savings accounts and ISAs* with no serious catches

*Based on the highest interest rates and the best guarantees in the whole market, and excluding accounts that are exclusive to existing customers or just a portion of savers, or accounts with onerous catches, such as withdrawal penalties on easy-access accounts.

**No early withdrawals

You can see a lot more similar accounts here.

As you can see from column four in my table, beating 5.1% inflation with a single, simple savings account is currently impossible. This means that we'll be able to buy less with our savings as time goes by, even though we've earned interest, because prices have risen even faster.

However, more complicated or interesting products mean more risk, and we can't afford to do that with emergency savings or any money we might need in the next few years, so mostly we're stuck with what we've got.

Related how-to guide

Build up your savings

Here's how to get into the savings habit, find forgotten money, work out the real value of a savings rate and build up that emergency savings pot.

See the guide

A new savings account

You'll notice from my table above that I've not included any deals longer than one year. That's because no ordinary term savings accounts are paying a good enough rate to justify locking your money in for longer – especially with the fear of higher inflation to come.

Yet every now and then we get some special inflation-beating deals, and we have one now: BM Savings has a new savings account, the 5 Year Inflation Rate Bond, which pays the RPI rate plus 0.25%, with a minimum interest rate of 0.25%, should RPI go negative.

The interest rate that you will earn is set each January. So if you invested today, the interest you earn for your first year of saving will be based on the RPI figure in January 2012.You can save from £500 to £1m (or £2m for couples) and early withdrawals are not permitted.

You should realise that the latest RPI figure always reflects the past 12 months. Hence, you're not being paid the current inflation rate, but the rate of inflation for the year gone by. This could work out better for you if inflation falls next year as the Bank of England expects, but it won't if inflation rises over the next few years.

Buy now while stocks last

Unusual savings deals are rather like any special offers you get in the supermarket: there's limited quantity. Banks and building societies decide in advance how much savings they want to attract to the deal and will close it when they reach their targets. It's first-come, first-served.

Unfortunately, until the start date of this product on 28 March 2011, you'll get just 0.5% interest if you transfer early. Yet this product could be closed quickly due to high demand, so if you're interested you may have to grit your teeth and go for it now.

My opinion

Due to spiralling prices, many of us may feel unmotivated to Build up our savings, but my research shows that with some effort we can pretty much hold our own with inflation over the long run if we keep our money flexible, although some years, like now, it's harder, and in other years it's a bit easier.

Before taking out the BM Savings product, I recommend you first look for a good easy-access cash ISA or one-year fixed-rate ISA. (Take a look at The top 10 cash ISAs for 2011.) If you surpass your ISA limits (currently £5,100 for a cash ISA), you should use an easy-access savings account for the rest of your emergency savings or savings you're likely to need very quickly. (Take a look at The best savings accounts for 2011.)

For any excess savings after that, I think that this BM Savings account is pretty good, at least for basic-rate taxpayers, provided you're happy to lock your money up for five years. Yet to match inflation you'll need to supplement these accounts with some additional special deals and techniques, such as the product shown in Earn £60 from an empty current account and the techniques described in Earn 15% interest on your savings.

You may also currently find special regular saver deals at your own bank, because banks are beginning to reward loyalty with interest rates of 6% to 10% for monthly savings. These products and techniques combined should help boost any small-to-medium sized savings pots up to around inflation.

This article was updated in February 2011.

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