Fight inflation with a top savings account

Published:
15 December 2010
Topic:
News,Money,Savings

Inflation rose again in November, as prices for food, furniture and clothing rocketed. So what does this mean for your savings?

According to the Office for National Statistics, Consumer Prices Index inflation rose to 3.3% last month, up from 3.2% in October. Retail Prices Index inflation, which also takes into account the cost of housing, increased to 4.7%, up from 4.5%.

There's no escaping the fact that 2010 has been a horrible year for savers. Not only has base rate stuck at its historic low of 0.5% for 21 months, but inflation has remained stubbornly high.

Low rates and high inflation are a toxic combination for anyone wanting decent returns on their savings pot. Many accounts are paying painfully low interest rates, while inflation nibbles away at the value of savers' money.

But with so many accounts paying only a fraction above the base rate, where are the best places to go for decent returns?

Find a decent fixed rate deal

One way of securing a high rate of interest on your savings is to take out a fixed rate bond and agree to lock your money away for a set period of time.

Because you agree not to touch your savings for the duration of the fix, banks and building societies will often offer you a higher return on your cash than you would get in an easy access account.

And the longer you fix for, the higher a rate you can secure. For example, there's a new market-leading account from Coventry Building Society, the CallSave Fixed Bond (128), paying an inflation-busting 4.75% until the end of April 2016.

You only need a minimum deposit of £1, so this account is open to all levels of savers.

Be aware that if you do withdraw money before 2016, you'll sacrifice 180 days' worth of interest, so you need to be happy leaving your money untouched until the account matures.

Alternatively, the AA offers a 5 Year Fixed Rate Savings account that pays an inflation-busting 4.50%, as does the State Bank of India's Hi Return Fixed Deposit, although you need to save at least £1,000 to qualify for the latter.

Of course, for many people it will be too restrictive as you pay a substantial penalty of up to a full year's interest if you make a withdrawal during the term.

Another high-paying option is Birmingham Midshire's Internet 5 Year Fixed Rate account, paying 4.40%. Again, you will sacrifice interest if you want to make an early withdrawal.

But what if interest rates rise?

Of course, the risk with a lengthy fixed rate bond is that interest rates start to rise and you end up locked into a rate that has become uncompetitive.

The Bank of England's Monetary Policy Committee, which decides what base rate will be, has said it is watching inflation "like proverbial hawks". That means it could decide to raise the rate if inflation continues to exceed the 2.00% target.

So many people will prefer not to lock their money away for a full five years, in which case a shorter-term fixed rate could be a better idea.

That way, you can achieve higher returns than on an easy access account, but you'll only be tied into the account for a short period, such as one or two years.

For example, the Post Office's Growth Bond Issue 13A pays 3.65% for two years on a minimum investment of 3.65%.

If 24 months is too long for you, how about Norwich & Peterborough's 1 Year E-Bond, paying 3.15%?

When you consider that the very best easy access account available, the Northern Rock E-Saver Issue 4, pays 3.00% on a minimum investment of £10,000, you can see why many people are willing to sacrifice access to their cash for a higher rate.

If you don't have £10,000 to save, the second best easy access account is the Post Office's Online Saver, paying 2.90% and requiring a minimum investment of just £1.

Before you lock all your money away into a fixed rate deal, do bear in mind that it's a good idea to keep some ready cash in an easily accessible account in case of emergencies.

Earn a better rate on your current account

Another way to beat inflation is to earn a better rate of interest on the money in your current account.

Many accounts pay practically nothing, but if you regularly leave a balance and never go overdrawn, then this can be another way to protect your pennies from soaring inflation.

For example, the Santander Preferred In-Credit Rate Account pays a market-leading 5.00% on balances of up to £2,500. So, with a £1,000 average balance, you'd earn an impressive £50 a year in interest.

If you apply through moneysupermarket.com, you also receive £50 in Love2Shop vouchers, which are redeemable in most high street shops.

Alternatively, the Halifax Reward Current Account pays a £5 reward as long as you pay in £1,000 every month, adding up to £60 a year.

Exercise your ISA allowance

Another great way to protect your money is to avoid paying tax on the returns through a cash ISA. You can save up to £5,100 a year into one of these tax-free accounts.

Cash ISAs come in as many different varieties as normal savings accounts. For example, if you agree to lock your savings away for four years, you can earn 4.25% tax-free with the Halifax Fixed Rate ISA Saver.

You will need to save at least £500, but the account does accept transfers in from previous tax years, so all your ISA cash can earn that competitive rate.

If you want an easy access cash ISA, then Santander's Flexible ISA Issue 3 pays 2.85% tax free, although it doesn't accept transfers.

You'll want to shift transfer the balance to a new cash ISA after 12 months, as this rate is bolstered by a 2.35% bonus, so your returns will fall quite dramatically after a year.

If you have existing ISA funds that you want to transfer in, then Halifax's Cash ISA Direct Reward and Nationwide's e-ISA pay 2.80% and allow you to move funds over from other ISA accounts.

Move now

In this low interest rate environment, it's very easy to decide it's not worth transferring your savings. However, it has never been so important to switch to a better account and shield your money from high inflation, so don't delay - move your savings today.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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