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Can any savings accounts beat inflation this month?

UK inflation remained at 2.7% in December

The consumer prices index (CPI) remained at 2.7% for a third consecutive month.

The overall CPI figure – which is the standard inflation measure used to show how prices have changed over the last 12 months – has remained the same over the last quarter. However, there have been changes to the pressures on inflation at a more detailed level. 

According to the Office for National Statistics (ONS), gas and electricity bills saw some of the fastest price rises, along with food and non-alcoholic beverages, while falling air fares provided one of the biggest downward pressures.

Meanwhile, the retail prices index (RPI) – the measure of inflation that includes mortgage interest payments – crept up to 3.1%, from 3% in November. Utility bill increases were the most significant contributing factor to this increase.

Inflation an obstacle to savings growth

With inflation at its current level, a basic-rate taxpayer would need to find an account paying 3.38% to beat CPI, and have an account paying 3.9% to beat RPI.

Higher-rate taxpayers face an even bigger challenge – they would need an account paying 4.5% to beat CPI and 5.16% to beat RPI. Unfortunately no savings accounts are able to beat inflation at present, for either basic-rate or higher-rate taxpayers.

The best instant access account – the Post Office Instant Saver – pays 2.10%, but 2% of this is a 12-month bonus, so you would need to switch after a year to avoid the rate plummeting to a meagre 0.1%.

Even the best five-year fixed rate account – provided by FirstSave – is unable to beat inflation, paying just 3.05%.

Save tax-free with a cash Isa

As all interest earned within a cash Isa is free from tax, the rate you need to earn is the same as the headline inflation rate. The overall Isa limit for the 2012/2013 tax year is £11,280, of which £5,640 can be placed within a cash Isa. From 6th April 2013 the limits will increase to £11,520 and £5,760 respectively.

At present, there is only one instant access cash Isa on the market which beats inflation – the Advantage Isa from Marks & Spencer Bank, which pays 2.75%. However, new applications for this account will no longer be accepted after 21 January 2013.

The Direct Cash Isa Issue 5 from the Cheshire Building Society offers the next best instant access rate, at 2.50%, but this account does not accept transfers in.

If you don’t need instant access to your savings, you can secure a higher rate by placing your money in the 60 Day Notice Isa Issue 2 from Coventry Building Society, which pays a healthy 3.10%. However, at present it’s not worth tying your money up for longer, as no fixed-term cash Isas currently available offer a higher rate than the best instant access account.

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