Low interest rates and steep inflation have dogged savers for the past few years, but at last the situation is showing signs of improving.
Inflation, as measured by the Consumer Prices Index (CPI), fell to 3.6% in January, down from 4.2% in December last year, due mainly to the January 2010 VAT increase dropping out of annual comparisons for the first time.
It is the fourth month in a row that inflation has fallen, although it still remains at almost double the government's 2% target. To beat inflation, basic rate taxpayers now need an account paying at least 4.51% to gain benefit in real terms from their savings, increasing to 6.01% for higher rate taxpayers, and 7.21% for 50% taxpayers.
Kevin Mountford, head of banking at MoneySupermarket, said: "The continuing fall in inflation is great news for hard-pressed savers, and this should really help encourage people to start saving again.
"High inflation combined with low interest rates has particularly impacted on UK savers who have found it very difficult to gain any real returns on their savings pots. With this fall in inflation, there will be some savings accounts which will now beat inflation, and consumers need to make sure they are on the best deals possible to maximise the returns.
The top-paying savings accounts currently offer rates more than six times that of base rate so by choosing these, you can reduce the impact inflation has on your pot."
According to a recent MoneySupermarket poll, a fifth of consumers will now start saving as a result of falling inflation, so here, we look at some of the accounts which can minimise its impact...
Fixed rate bonds
Longer-term fixed rate bonds, usually those with a five-year term, provide one of the few ways for savers to earn real returns. Currently, five fixed rate bond accounts pay a rate which beats inflation for basic rate taxpayers, and 69 beat inflation for non-taxpayers.
Scottish Widows has just increased its five-year Fixed Term Deposit Account to 4.70% annual interest before tax However, you do need to invest at least £10,000 in this account. You cannot make any withdrawals during the five-year term, so you must be certain you can afford to tie up your cash for this long.
Halifax's four-year Fixed Online Saver account pays a market-leading 4.15% over this term, and can be opened with a minimum investment of £500. You cannot make any withdrawals, but you can close the account early if necessary, although you will lose 320 days' interest.
If you prefer a shorter-term fixed rate, there are plenty of competitive deals available. These include Allied Irish Bank's two-year fixed rate bond which pays 3.80% annual interest before tax on a minimum investment of £1,000, while United National Bank's one-year fixed rate bond pays 3.30% on a minimum investment of £2,000.
Fixed rate ISAs
There are 26 fixed rate ISAs which currently pay a rate which beats inflation, so if you haven't yet used your allowance this year, you should take make the most of it before April 5, which marks the end of the tax year.
As with fixed rate bonds, the highest fixed rate cash ISA returns go to those who can afford to lock up their cash for five years. Kent Reliance Building Society pays a generous 4.35% annual interest tax-free on its five-year cash ISA, and you need a minimum investment of £1,000 to open the account. Unusually for a fixed rate account, withdrawals are permitted, but you will be charged 180 days' interest on the amount withdrawn.
Alternatively, Halifax's ISA Saver Fixed account pays 4.20% annual interest before tax on a minimum deposit of £500. You can't make any withdrawals, but you can close the account early, although you will lose 365 days' interest if you do this.
You can still earn competitive rates of interest even if you don't want to tie up your money for as long as five years. For example, NatWest pays 4.20% annual interest tax free on its three-year fixed rate ISA providing you transfer money held in existing ISAs into the account.
For those who prefer a two-year term, Governor Money pays 3.75% on its two year fixed rate cash ISA via Progressive Building Society, and this account can be opened with a minimum investment of £100.
Easy access and notice accounts
While no easy access or notice accounts currently pay a rate that beats inflation, ensuring you earn as much interest as possible will certainly help limit its impact.
Santander's eSaver Issue 4 account, for example, pays 3.10% before tax on a minimum investment of £1, although this rate includes a steep 2.60% bonus for the first 12 months. This account allows unlimited withdrawals.
Other options worth considering are the Investec High 5 Issue 2 Account and the Investec High 10 Account. Respectively they offer the average of the top five and 10 best-buy accounts as chosen by Moneyfacts.
At launch, the interest rate on the Investec High 5 Issue 2 Account is 3.17% and 3.11% for the Investec High 10 Account. Both these rates are before tax. The minimum deposit required for both these accounts is £25,000.
You must give six months' notice if you want to make a withdrawal from the High 5 Issue 2 account and three months' notice if you want to take money out of the High 10 account.
Index-linked bonds
Think carefully if you are considering investing in an index-linked account in order to beat inflation.
When inflation is high, then these accounts offer an excellent way to ensure your savings will maintain their purchasing power. But if inflation continues to fall, most of these bonds will only give you back what you invested at the outset, plus a lower fixed rate of return than you might have achieved elsewhere.
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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