The top inflation-beating savings accounts

by Rachel Wait on 29 May 2011  |  4 comments
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If your savings are suffering, here's how to ensure you get a better deal.

Unless you’ve been hiding in a cave for the past couple of years, you’ll know that savers are getting a pretty raw deal right now.

Not only has base rate remained at a pitifully low level of 0.5% since March 2009, resulting in utterly pathetic interest rates on savings accounts, but inflation has also been on the rise, so anything we do save is simply getting eroded away.

The only solution to this is to find a home for your savings that offers a higher return than inflation.

But according to research by Defaqto, this is a big challenge because, based on the Retail Prices Index (which actually fell slightly from 5.3% in March to 5.2% in April), only 0.3% of the 1,869 savings accounts on offer give a real rate of return to basic rate taxpayers. Eek!

Related how-to guide

How to beat inflation

Inflation means that the cost of living is going up, and that your money doesn’t go quite so far. But there are ways to beat it.

See the guide

Indeed, a basic rate taxpayer would need to earn a rate of 6.50% to achieve a real rate of return based on RPI, or 5.63% based on the Consumer Prices Index (which rose from 4% in March to 4.5% in April).

Meanwhile, a 40% higher rate taxpayer would need to earn a rate of 8.67% or 7.50%.

So let’s take a closer look at how many accounts do just this.

Beating RPI

The table below reveals the percentage of available savings accounts that provide a real rate of return on the account’s highest rate, based on RPI.

Source: Defaqto

Beating CPI

The table below shows exactly the same, but this time based on CPI.

Source: Defaqto

This paints a pretty gloomy picture for savers. After all, if you’re a taxpayer, it’s become pretty difficult to find a savings account that gives you a real return based on CPI, and even harder to find one that gives you a real return based on RPI.

So if you are after an inflation-beating savings account, what can you do? Well, one of your best bets is to opt for an inflation-linked savings account. Let's take a look at some of your options.

Inflation-linked savings accounts

The table below highlights the highest interest rates you can currently earn with an inflation-linked savings account.

*Also available from Barnsley BS and Chelsea BS.

Source: Defaqto

As you can see, you do have some options, but sadly the choice isn’t huge. Birmingham Midshires had, up until last week, also offered some decent inflation-linked accounts – however, these are no longer available to new customers, limiting your choice further.

Instead, one of the best accounts currently on offer is the Krbs Inflation Linked Cash ISA. The great thing about this account is that not only do you beat inflation, but because it’s a cash ISA, you also won’t have to pay any tax on your savings. Bonus!

If you take out the Krbs Inflation Linked Cash ISA, your cash will be linked to the RPI – and this is good because RPI tends to be higher than CPI, so you can get a better rate of return.

The account is linked to the rate of inflation over the next five years – so if it goes up, then so will your tax-free interest. Any increase in the RPI will be measured as the percentage increase between the levels of the RPI for April 2011 and April 2016. And on top of that you'll receive an interest rate of 2%.

This also means that even if inflation falls during those five years, you’re at least guaranteed a return of 2%.

Your initial deposit can be from £2,500 up to the current cash ISA limit of £5,340 – further deposits are not allowed. However, the account does also allow you to transfer existing ISA funds across.

Of course, the major downside to this is that you will need to tie up your funds for five years. If you need to access your funds early you will only receive back your initial investment. So it’s worth considering carefully whether you’re happy to lock up your money for this long.

If you do want to apply for this account, you need to be quick as it will close to new applications on 15 June.

NS&I Savings Certificates are back

Another good option is the National Savings & Investments Savings Certificate which recently made a comeback. Again, any investment you make will be tax-free, but this time it's completely separate from your ISA allowance. You can invest from as little as £100 to as much as £15,000.

The five year saving certificate pays RPI plus 0.5% - although this is the rate of interest you’ll receive if you leave your investment untouched for the full term, as you get a different rate of fixed interest each year, as follows:

• Year 1: 0.25%
• Year 2: 0.35%
• Year 3: 0.40%
• Year 4: 0.65%
• Year 5: 0.86%

It’s also worth noting that if you keep your savings certificate for the full term, you will always receive the guaranteed interest even if RPI falls. The interest will be added on each anniversary, at the rate for that year.

Finally, NS&I savings certificates are backed by the government so your savings will be safe, and again, if you want to take out a savings certificate it’s worth acting quickly as they may not be around for long. If you’re at all confused about NS&I savings certificates, have a read of How NS&I index-linked savings certificates really work.

So if you’re looking for a way to beat inflation, now you know how!

More: Get a great savings account | What to do now before rates rise | The top 16 cash ISAs