Are Your Savings Protected From Inflation?

This is a question that we should be asking ourselves and yet millions of savers are seeing the real value of their savings dwindle as rates continue to fall and inflation rises to 1%.

Savers are hoping to see their money grow yet over 50% of all savings accounts available now guarantee depositors a significant loss. In June the rate of inflation was 0.3% and it was suggested then that that over 600 bank accounts were paying their customers much less than that.

How Does Inflation Work?

In the UK we have two main inflation rates, the Consumer Prices Index (CPI) and the Retail Prices Index (RPI). Recently inflation has crept up significantly. To explain it simply: if something cost 48p last year and 50p this year then you could say that inflation was just over 4%. Judging this against other goods and services then you can see whether the cost of living has gone up or down.

In order for you to see growth in your savings the interest must be greater than the rate of inflation. Otherwise you will make no profit.

Accounts Where Savers are Earning Less than 1%

There are many accounts that are now paying less than inflation but they are still taking on new customers every day. It’s worth checking your rate if you’re hoping to see growth. According to the Bank of England, the average account is paying under 0.3% interest.

For example, First Direct's current account now pays 0% and they aren’t the only ones.

Many previously lucrative current accounts will be getting their rates cut shortly. TSB is reducing their 5% interest to 3% in January and Natwest is cutting the rate of its instant saver from 0.25% to 0.01pc on October 31. Most major banks are cutting interest rates by January 2017.

What Can You Do to Protect Your Savings?

• Use your cash ISA allowance

You have an allowance to put in a cash ISA each tax year. The interest you earn is tax-free which can provide you with a boost on higher amounts. However, from April 2016, basic rate taxpayers are allowed to earn up to £1,000 of savings interest each year without having to pay any tax on it, so the main distinguishing feature of ISAs are no longer so obvious.

• Keep reviewing your savings

Keeping your savings in a high interest account is a major way to beat inflation. Many savings accounts will have had high incentives at the start but may now be losing you money. So it’s a good idea to shop around.

Octopus Choice suggests that savers need to find an account that pays 1.41pc or over during the year if they would like to break-even.

Current Account Options:

At the moment current accounts are some of the best options for savers as many do still offer higher rates of interest, at least for a certain amount of time.

Currently the best high interest accounts pay up to five times inflation. However, this is likely to change with upcoming cuts. 

Current accounts also pay high interest on small balances while also providing extra rewards and incentives. However, they can also have other criteria you need to fill such as holding two direct debits from the account and paying in a minimum each month.

Here are some accounts which are currently offering great rates:

• FlexDirect - this account by Nationwide offers 5% on balances up to £2,500. However, this rate is only paid for 12 months and savers must pay in £1,000 each month. Nationwide has said there are no planned reductions which makes them a great choice with so many other accounts making cuts.

• TSB’s Classic Plus – this account offers 5% on a smaller balance of £2,000. This rate will change to 3% on £1,500 from January 4. Customers must credit the account with £500 a month and register for online banking, paperless statements and correspondence in order to receive the interest.

• Club Lloyds - Those who are able to pay a higher amount of £4,000 to £5,000 could earn 4% interest with this account. However, this will be changed to 2% on balances below £5,000 from January 8th. Customers must set up two direct debits and pay in £1,500 each month to avoid the £5 monthly fee.

• Tesco Current Account – Tesco currently pays 3pc on £3,000 and has not yet announced a cut to the rate. You can also earn Clubcard points on your shopping and fuel making this a potentially great account for saving.

• Santander’s 123 current account - Those with larger balances may want to consider this account even though it is reducing its 3% rate to 1.5% from November 1. As it offers this rate on up to £20,000, the highest amount of any current account, it is still competitive. It charges a £5 monthly fee which would be covered if you make the most of the 3% cashback on household bills. You may also have two accounts in your name as long as one is joint meaning couples can save a total of £60,000 between them.

Considering this, it’s always a great idea to be on the lookout for better current account deals to make the most of the incentives and high interest rewards on offer. With the 7 day switch service, it’s now easier than ever to switch which makes fighting inflation a little easier.