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Best savings rates still lagging behind inflation

Despite inflation drop, savings can’t keep pace
Savings piggy bank

Inflation is still high, making it difficult for savers to generate real returns on their cash

Figures from the Office for National Statistics (ONS) show that inflation fell in March – but savers still face an upward struggle if they want to prevent the real value of their cash from being eroded, say Which? Money experts.

The Consumer Prices Index (CPI), the government’s preferred measure of inflation, fell to 4% in March – down from 4.4% in February. Reductions in the price of food and non-alcoholic drinks help to explain the drop, according to the ONS.

Meanwhile, the Retail Prices Index (RPI), which takes into account housing costs, dropped from February’s 20-year high of 5.5% to 5.3% last month.

Yet while high inflation is the enemy of savers and many will be relieved to see it slipping, these figures won’t make a significant difference to the struggle people face when trying to ensure the returns on their cash keep pace with price rises.

Best Rate savings accounts, inflation and basic rate taxpayers

Because basic rate taxpayers lose 20% of the interest they earn on money they put by, they currently need to get a return of 5% on their savings accounts to ensure CPI inflation doesn’t eat into their cash.

Inflation is a measure of how quickly prices are rising – so if it outstrips the rate you earn on your savings, in effect this means the amount of goods you can buy with your money (the ‘real value’ of your cash) diminishes, rather than increases, while you have it put by.

Right now, very few savings accounts are offering returns of 5% or more – and most that do are tax-free fixed-rate cash Isas.

Fixing your savings for several years might appeal to you if you’re keen to maximise the interest your earn on your money – in which case you should visit our cash Isas and Best Rate savings accounts reviews. 

However, fixing your savings can be risky as you won’t be able to access your cash easily in an emergency – and you could lose out if the Bank of England base rate rises during the term of your fixed-rate deal.

Finally, it’s important to note that it’s only possible to put up to £5,340 in a cash Isa in the current tax year – so even if you find an inflation-beating account, you won’t be able to hold a balance in it that exceeds this level.

Best Rate savings accounts, inflation and higher rate taxpayers

If you’re a higher-rate taxpayer, a savings account with a return of 6.67% would be needed in order for your money to keep pace with CPI inflation. This is because you stand to lose 40% – or in the case of top rate taxpayers, 50% – of the interest you earn on your savings to HM Revenue & Customs.

Currently, there are no savings accounts available offering rates that high. Meanwhile, none of the savings accounts on the market offer high enough returns for any taxpayer looking to keep pace with RPI inflation.

Finding the best home for your savings

Which? savings analyst Paul Davies commented: ‘CPI inflation is still way above the government’s target of 2%, and RPI is also at a historically high rate. Consequently, these are difficult times for savers – especially older people and pensioners, who may rely upon the interest they earn on savings for an income.

‘Meanwhile, the savings market isn’t ripe with accounts that will help consumers fight the effects of inflation; interest rates are still fairly low, in part thanks to the 0.5% Bank of England base rate.

‘Nevertheless, if you’re a saver it’s still crucial to shop around and find the very best deal you can. Ensure you use your Isa allowance, as this is a simple way to circumvent the damaging effect of tax on your nest egg – and then consider a Best Rate savings deal to suit your needs.

‘If you’re fed up with getting poor rates on your cash, you may also want to consider investing as an alternative way to generate better returns – perhaps using a stocks and shares Isa. However, it’s crucial to get proper financial advice before investing if you are a beginner. Read our guides to Finding an independent financial adviser and Starting to invest for more information.’

pound coins

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