The best inflation-beating savings and current accounts

Updated on 19 September 2018 | 0 Comments

A shock jump in CPI inflation means savers will need to be proactive with their cash if they want to avoid losing money in real terms.

Inflation surprisingly jumped from 2.5% to 2.7% in August, latest official stats reveal.

Rising prices for recreational goods, transport and clothing pushed the CPI measure of inflation up 0.2% to a six-month high, according to the ONS.

Most economists had been predicting a fall of 0.1%.

It means there are now just two fixed-rate bonds in the entire market that can beat the rising cost of living, both of which require you to lock your money away for a staggering seven years.

But, as loveMONEY's Sam Richardson wrote here, long-term deals are a risky option given that savings rates could well rise in the coming months and years.

So savers should think carefully about stashing their cash elsewhere.

Read: What CPIH, the newest measure of inflation, means for your money

ONS graph plotting CPI over the last five years (Image: ONS)

What options are available to you

We're at risk of sounding like a broken record here, but you can earn a far better rate with some or all of your cash savings... provided you're willing to jump through a few hoops.

The highest-interest accounts are really only suitable for smaller sums of money as the headline rates tend to drop off a cliff after a certain threshold is passed.

If you have a really large pot, you'll mostly be interested in the next section in fixed-rate accounts.

However, as mentioned earlier you'll either need to lock your money away for a very long time or get an easy-access account and lose money in real terms while waiting for better rates to come along.

Or you could take on some risk and invest in the stock market

Right, let's take a look at the various inflation-beating savings options available to you.

Compare savings accounts, ISAs and peer-to-peer accounts on loveMONEY

Lock your money away for a long time

As mentioned earlier, there are only two fixed-rate deposit accounts that beat inflation. Both pay 2.75% and require you to lock your money away for seven years.

The first is from PCF Bank, which comes with a minimum deposit of £1,000. The second is from BLME, which is a sharia compliant bank meaning you earn an 'expected profit rate' rather than a traditional interest rate, and comes with a heftier £10,000 entry point.

If seven years is simply too long to even consider, there are two five-year deals that at least match the current 2.7% rate of inflation: Charter Savings Bank (£1,000 minimum) and BLME (£10,000 minimum).

Readers who keep a close eye on savings rates will note that the best deals have remained largely unchanged despite last month's 0.25% Base Rate hike

It's a frustrating situation which (to flog that horse again) highlights why savers need to be proactive with their cash in order to make the best of a pretty rotten situation.

Compare fixed-rate, access savings accounts, Cash ISAs and P2P investments on loveMONEY.

Savings accounts (with strings attached)

Various regular savings accounts can smash the current rate of inflation, with top accounts paying a whopping 5%.

Sadly, these are quite restrictive accounts.

First off, that great rate is only available for one year, after which point the amount you earn will fall dramatically.

Secondly, they’re really designed to attract new savers as you can’t put in a lump sum, although existing savers can at least funnel up to £300 a month into them before the rate falls after one year.

Finally, the top-paying accounts – from HSBC, Nationwide, First Direct, Santander and M&S – are only available to current account holders of each specific bank.

For most people, opening a new current account just to earn £80 odd over a year isn't really feasible (although HSBC, First Direct and M&S offer money, vouchers or gifts for switching).

Not for you? Compare more deals in our savings comparison centre, or have a look at our comprehensive roundup of all the best cash savings strategies.

Why inflation always works in the Government's favour

Inflation-beating savings accounts listed (Image: Shutterstock)

Current accounts (with strings attached)

Speaking of current accounts, quite a few still offer inflation-beating rates and allow a little more flexibility than regular savings accounts.

The Nationwide FlexDirect account offers a top rate of 5% on balances of up to £2,500. However, this will drop to a measly 1% after the first year, so you will need to move your money again.

You’ll also need to deposit at least £1,000 a month to benefit from the top rate.

TSB has raised the interest rate on their Classic Plus account to 5%, on balances of up to £1,500 (although we wouldn't blame you for being a little sceptical about putting your money there right now).

Unlike the Nationwide deal, the rate doesn’t drop after a year, and you just need to deposit £500 a month and opt for paperless statements to qualify for interest each month.

Additionally, you can earn £5 cashback every month by setting up two direct debits and a further £5 if you use your card 20 times a month.

Finally, the Tesco Bank Current Account guarantees to pay 3% on balances up to £3,000 until 1 April 2019, but you'll need to pay in at least £750 a month and set up at least three Direct Debits to earn that rate.

Other options to consider

If you are saving for a house or your retirement and are under 40 years old, then you could benefit from the new Lifetime ISAs.

These allow you to save up to £4,000 of your annual ISA allowance in cash or stocks and shares and, on top of the return, these offer the Government promise to boost what you save by 25% each year.

Skipton Building Society and Nottingham Building Society are the only two banks to offer the LISA at present. Both pay a measly 1%, but that Government – or taxpayer-funded – bonus means you'll get a markedly better rate overall.

Alternatively, it might be worth considering moving some of your cash into other places that have more risk but could offer greater rewards.

One option is peer-to-peer lending, where you lend your money to individual borrowers, businesses or investors.

This area currently isn't protected by the Financial Services Compensation Scheme but could offer far higher returns than a high-street account – plus, since April 2016 you can hold some peer-to-peer investments in an Innovative Finance ISA (IFISA), which means you can save up to £20,000 tax-free.

Fed up with paltry savings rates? Read our beginner’s guide to Stocks & Shares ISAs

This article is regularly updated

Other ways to make your money grow:

Beginner's guide to buying and selling shares

Classic car investment: can you actually make decent returns?

How to become a buy-to-let landlord


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