The best inflation-beating savings and current accounts

Updated on 13 February 2018 | 7 Comments

Inflation has held at 3%, meaning you'll still have to look beyond traditional savings products if you want to beat it. Be warned: these accounts come with a host of restrictions and are only really suitable for people with small to moderate savings pots.

Inflation remained stubbornly high in January at 3%, according to the latest official figures.

Having dipped from 3.1% to 3% in December, analysts had expected a similar reduction to 2.9% as part of an ongoing downward trend in 2018.

However, price rises in clothing, footwear and recreational goods and services meant CPI remained stuck at 3%.

While this is being seen as little more than a blip, it will nonetheless fuel more talk of another hike to the Base Rate of interest, which would have a deflationary effect.

“Inflation has now been above [the Government] target for 12 straight months,” says Ben Brettell, senior economist at investment firm Hargreaves Lansdown.

“This adds further weight to the case for higher interest rates sooner rather than later.

“Indeed, Bank of England policymakers said last week they’ll try and bring inflation back to target more quickly than previously expected, which means rates could rise faster and further than anticipated.”

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

More pain for savers

So what does persistently high inflation mean for your money?

As Maike Currie, personal investing director at Fidelity International, point out, it can be both your friend and your foe.

It all depends on your financial situation.

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“A little bit of the right type of inflation can be a good thing,” says Currie.

“It’s a sign of an improving economy and for borrowers; it means their debts will reduce over time in real terms. Those that bought a house in the 1970s will know first-hand how the value of their mortgage debt decreased in real terms as their wages increased.

“Governments also welcome some inflation as they see the value of their borrowing reduce too.

“However, it’s a different story for savers or those reliant on a fixed income like retirees.

"Despite speculation about a looming rate rise, if inflation remains in check, there’s no incentive for the Bank of England to put up rates too soon.

“This means the stock market will be one of the few places offering inflation-beating returns.”

Read: A beginner’s guide to Stocks & Shares ISAs

Of course, investment comes with risk, and that’s not something everyone is comfortable with.

Indeed, many people choose to hold at least some of their nest egg in cash.

The challenge here is that few no traditional savings accounts even come close to beating the current rate of inflation.

Inflation-beating rates are possible... for some

The good news is that's still possible with your cash savings. The bad news is you'll have jump through a few hoops to do so.

What's more, these 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, we've offered a few alternatives further on in this article, but in short you'll probably need to make do with one of the best fixed-rate deals and lose money in real terms (for the time being, at least) or, as mentioned, take on some risk and invest in the stock market

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

Savings accounts (with strings attached)

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

The catch? There are a few, actually.

First off, the 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 Nationwide, First Direct, Santander and M&S – are only available to current account holders of each specific bank.

Not for you? Compare more deals in our savings comparison centre.

Why inflation always works in the Government's favour

Current accounts (with strings attached)

Some current accounts still offer inflation-beating (or at least inflation-matching) 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.

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.

Alternatively, there’s the TSB Classic Plus account, which pays 3% on balances of up to £1,500.

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.

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 is the only provider to offer a Cash LISA at present. It pays a measly 0.75%, 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.

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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