UK inflation has risen to a five-and-a-half year high of 3% – the highest level since April 2012.
The figure, as measured by the Consumer Price Index (CPI), cannot be beaten by any savings accounts or cash Isas. It’s also significantly higher than average UK wage growth – wages only rose by 2.1% per year in the three months to July.
It means that pensioners will receive a 3% increase in their basic state pension payments from next April.
These payments rise annually by either average wage growth, September’s inflation figure or 2.5%, whichever is highest.
State pension payments to jump to £164 a week
The current level of the state pension is £159.55 for people that reached pension age after 6 April 2016.
With inflation at 3%, this means that people receiving the new state pension will get £164.33 a week in April 2018.
For those that qualified for the state pension before that date, they will see an increase to the basic state pension, currently £122.30. It will rise to £125.96 a week.
How to fight back against inflation
High inflation is bad news for savers.
If inflation is higher than the interest you’re earning on your savings, it means the value of your money is dropping in real terms.
This will almost definitely be the situation for anyone with money stored in a traditional savings account or cash Isa. The highest rate in the Which? Money Compare savings tables is 2.45% AER on a five-year fixed savings account, and 2.4% AER on a five-year fixed-rate cash Isa.
Those who don’t want to lock up their money for so long will either have to settle for even lower rates, or take a punt on some of our inflation-busting savings alternatives listed below.
Regular savings accounts
Regular savings accounts offer rates of up to 5% AER, but they come with a cap on the amount of money you can deposit each month. What’s more, the best-rate accounts require you to also open a current account with the provider.
First Direct, HSBC, M&S Bank, Nationwide and Santander all offer regular savings accounts paying 5% AER, but only to existing current account customers. First Direct will let you deposit up to £300 per month. HSBC, M&S Bank and Nationwide will have a maximum monthly deposit of £250, while Santander’s monthly limit is £200.
Saffron Building Society has a regular savings account paying 3.5% AER which is open to everyone. Its maximum monthly deposit is £200.
Which? Money Compare table: regular savings accounts – dozens of accounts compared
Current accounts have offered savers a restbite from pathetic rates for some time, albeit only on small balances.
However, there is now only one current account paying an inflation-busting rate on in-credit balances. That’s the Nationwide FlexDirect Account, which pays 5% AER on up to £2,500 in the first year, and 1% AER thereafter.
Tesco Bank and TSB pay 3% AER on balances of £3,000 and £1,500 respectively.
Current account customers typically have to adhere to number of terms in order to receive interest. Before switching, take a look at our current account tables to see which provider suits you best.
Investing intelligently in stocks and shares is genuinely seen as more profitable long-term strategy than keeping money stored in cash savings. However, there’s no guarantee. The value of stocks and shares can go down as well up, so you’ll need to be comfortable with that risk.
If you’re not sure how to invest your money, our beginner’s guide to investing is a great place to learn, while our interactive investment portfolio tool automatically suggests a suitable place to put your money based on your attitude to risk.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.