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Which? uncovers the latest inflation-busting savings accounts

Inflation falls in February with lower fuel bills

Savings that beat inflation

Inflation has fallen for the fifth month in a row, giving hope to savers

Inflation in the UK has fallen for the fifth consecutive month, due to a drop in fuel bills in February, the Office for National Statistics has reported. 

The consumer price index (CPI), the standard measure of inflation, fell by 0.2 percentage points to 3.4% in February 2012, although this is still significantly higher than the 2% target set by the Bank of England. Meanwhile, the retail price index (RPI), which includes mortgage interest payments, dropped from 3.9% to 3.7%.

Find out more about why prices rise in our 60 second guide to inflation

Inflation-beating savings accounts

The drop in inflation over the past three months is starting to ease the pressure on hard-hit savers, who have been struggling to achieve a decent rate of return since the Bank of England base rate fell to 0.5% in March 2009. 

Basic rate taxpayers will need to receive interest of 4.25% in order to stave off inflation measured by CPI, while higher rate taxpayers need to find a savings account paying 5.67%. 

Savings accounts

For basic-rate taxpayers, there are seven Best Rate savings accounts that beat CPI, with Birmingham Midshires topping the table with an account paying 4.65%.

However, these are five-year fixed-rate accounts, and require you to tie up your money for the long-term. You risk missing out on better rates if the Bank of England base rate (currently at 0.5%) increases over the next five years.

Cash Isas

Those placing their savings into a Cash Isa fare much better. You’re not liable to pay any tax within an Isa and, therefore, it’s much easier to beat the lower rates of inflation. There is a £5,340 limit on savings within an Isa, although this will be increasing to £5,640 from 6 April 2012. 

There’s one instant access cash Isa that’s beating inflation measured by CPI – the AA Internet Access Isa, paying 3.5%. Beware that this Isa has a 3% bonus in the first twelve months, and doesn’t allow transfers in, meaning you can only put new savings, not those from existing Isas, into the account. 

If you were to tie your money up for one year, you could also get the same rate from Santander, which does allow transfers in. Be warned, though, that Santander regularly finishes at the bottom of our tables for customer satisfaction. 

The longer you tie up your money, the higher the rate you can receive – at least eight 3-, 4-, and 5-year fixed-rate Isas outstrip CPI for basic rate taxpayers. 

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