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Savings Accounts to Beat the New Rate of Inflation

With the Consumer Price Index at a two-year high, savers will have to be savvy to counter the effects of rising inflation

Kara Gammell 20 January, 2017 | 2:10PM

With the Consumer Price Index at a two-year high, savers will have to be savvy to counter the effects of rising inflation. CPI rose to 1.6% in December, an increase from 1.2% the month before. But figures from Moneyfacts.co.uk show interest rates continue to be cut by banks and building societies.

Of the 669 savings accounts currently on the market, just 44 can meet or beat inflation. What is more, none of these inflation-proof accounts are easy-access, with the majority being fixed-rate bonds with a minimum three-year period.

According to the comparison website, the number of rates being cut across the savings markets has outweighed the number of rises for the last 15 months. In December, four rates were cut for every one that went up; a total of 84 decreased last month, while just 21 rose.

“Dreadful Time to Be a Saver”

“With inflation expected to rise significantly over 2017, it is going to remain a dreadful time to be a saver,” said Rachel Springall, finance expert at Moneyfacts.co.uk.

“It will be no surprise if we start to see people sacrifice saving for the future in favour of overpaying their debts, particularly as there is little interest to be gained on most savings accounts currently on the market.

“Some savers already feel it is pointless to shop around for a better deal, assuming poor rates are everywhere, despite the majority not knowing how their current rate stacks up.”

Competitive Rates of the Past have Fallen

It is not just new accounts are offering such poor returns: many of savers who snapped up a competitive product a year ago might be surprised to learn how little interest they are getting on their deposits now. Research from SavingsChampion.co.uk found that there are currently 33 variable accounts which now pay a paltry rate of just 0.01%.

This number is set to rise; HSBC has announced plans to cut its rates on its Instant Access Savings and Flexible Saver accounts from 0.05% to 0.01% from January 25. To add further insult to injury, nearly a fifth of all easy access accounts are pay 0.05% or less.

“These rates are pathetic and any saver who is sticking with a bank that is paying them so little should really vote with their feet,” said Anna Bowes, spokesman at comparison website, SavingsChampion.co.uk.

“Many savers will think that small moves in rates are not worth their while doing the paperwork – but any increase in savings interest in the current environment is worth chasing, especially if you are stuck in one of the worst paying accounts.”

Shop Around for the Best Rates

Despite the bad news, some banks and building societies are still launching new savings accounts with competitive rates to attract new customers – so shopping around can pay off.

Savers on the lookout for a more competitive deal may want to consider a challenger bank, rather than the high-street giants, some of which have increased their rates over recent months.

"While savers may feel discouraged, it is still important to keep on top of the savings market, even if just a fraction more can be gained in interest,” said Springall.

"Since the start of 2017 we have seen a small selection of providers making minor improvements to their savings rates, which includes challengers such as RCI Bank, Post Office Money, Ikano Bank and Sainsbury's Bank. While this is positive news, there is still a significant way to go before we can see rejuvenation in the market."

If you have a considerable savings pot, it may make financial sense to divide your investments across regular savers, current accounts, fixed rates and instant access for the best possible chance of decent interest rates, while maintaining some flexibility. Bear in mind that while the government-backed Financial Services Compensation Scheme would refund your savings up to a maximum of £75,000 should your bank collapse, this limit is for each bank, not each individual account.

It is important to remember that if you have more than one account containing £75,000 with two banks in the same banking group, you would get total compensation of £75,000, unless each of the banks are individually authorised by the Financial Conduct Authority.

The Best Savings Rates

Savers on the hunt for a best-buy variable-rate cash ISA should consider NS&I’s Direct ISA, which pays 1%. This easy access account requires a minimum deposit of £1 and can be operated online or over the phone. Interest is calculated daily and added to the account once a year on April 6. Bear in mind that this is not a ‘Flexible ISA’. This means that all your deposits within the tax year will count towards your allowance, whether you make any withdrawals.

Also worth a look are Virgin Money’s Defined Access E-ISA Issue and Coventry Building Society’s Easy Access Isa 5, both of which pay 0.95% and 0.90% respectively on minimum deposits of £1.

For savers who are looking to fix their cash ISA rate, Bank of Cyprus UK’s 1 Year Fixed Rate Cash ISA tops the best buy table with a rate of 1.05%. This account requires a minimum deposit of £500, accepts transfers in and can be operated online, by post, in branch or over the phone.

However, early access to funds is only granted on closure of the account and you will be subject to 180-day loss of interest. While Leeds Building Society’s 1 Year Fixed Rate ISA is worth a look as it pays 1.01%. Here, savers must have a minimum deposit of £100, transfers of existing funds are accepted and this account can be opened and operated in branch or by post. Bear in mind that while withdrawals and transfers out are permitted, you will be subject to 60-days' loss of interest penalty.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Kara Gammell

Kara Gammell  is a freelance journalist and author, specialising in personal finance and consumer issues, writing for Morningstar.co.uk