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Can any UK savings account beat inflation?

UK inflation jumped to 2.7% in October

Savers have been hit with more bad news this month as inflation has increased after two consecutive months in which it fell.

The consumer prices index (CPI), the standard measure for inflation showing how prices have changed over the last 12 months, rose from 2.2% to 2.7% in October. Meanwhile, the retail prices index (RPI) – the measure of inflation that includes mortgage interest payments – jumped to 3.2%. This is up from 2.6% in September.

According to the ONS the key driver of the rise in inflation was university tuition fees, while food and non-alcoholic beverages also made a significant contribution to the increase, particularly potatoes, fruit and confectionery.

The impact of inflation on savings accounts

With savings rates continuing to tumble, the recent increases in inflation mean that savers face an even bigger struggle to secure a decent return on their money. A basic-rate taxpayer would need to find an account paying 3.38% to beat CPI, and an account paying 4% to beat RPI.

Higher-rate taxpayers face an even bigger challenge – they would need an account paying 4.5% to beat CPI and 5.3% to beat RPI. Unfortunately there are no savings accounts that are able to beat inflation at present, for either basic-rate or higher-rate taxpayers.

The best instant access account – the Isaver account from Intelligent Finance – pays 2.49%, while even the best five-year fixed rate account – the United Trust Bank’s Fixed Deposit account – falls short at 3.35%.

Save tax-free with a cash Isa

One way to help your savings keep up with inflation is to make full use of your cash Isa allowance. As you don’t pay tax on interest within a cash Isa, 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.

All of our Best Rate instant-access cash Isas currently either beat or match CPI with the best instant-access cash Isa from the Cheshire Building Society paying a healthy 3.00%.

If you’re in a position to tie your money up for longer, you can earn a higher rate of interest with the Two-year Fixed Rate Major Isa from Santander, which pays 3.30%, beating both CPI and RPI.

More on this…

  • Best rate savings accounts – we help you to track down the best deals in the market
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  • Stocks and shares Isas – find out more about tax-free investing
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