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No savings accounts can beat inflation, Which? reveals

UK inflation remained at 2.7% in November

There’s no respite for struggling savers over the festive period, as official figures show inflation remained unchanged during November.

The consumer prices index (CPI), the standard measure for inflation showing how prices have changed over the last 12 months, remained at 2.7% for a second month.

Although the overall figure remained the same, there were significant changes to the pressures on inflation at a more detailed level. Food and non-alcoholic beverages saw some of the fastest price rises, as did household services, particularly domestic gas and electricity.

Meanwhile, the retail prices index (RPI) – the measure of inflation that includes mortgage interest payments – fell to 3%, down from 3.2% in October. The most significant contributing factors to this decline were motor fuels and household equipment.

How inflation erodes savings

With inflation at its current level, 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 Everyday Savings account from Marks & Spencer – pays 2.35%, while even the best five-year fixed rate account – the Five-year High Yield account from Vanquis Bank – falls short at 3.01%.

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%. 

Until very recently, you could ensure a higher return on your savings by tying them up for longer, but no fixed-term cash Isas currently available offer a higher rate than the best instant access account.

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