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Inflation stays at 2.4%: is it time to move your savings?

How to find the best rates

It was revealed this morning that the annual rate of UK CPI inflation in May 2018 remained at 2.4%, unchanged from the rate in April.

Calculated by the Office for National Statistics (ONS), inflation measures the price of an imaginary shopping basket of more than 400 goods and services, compared with what the same items would have cost at the same time last year.

Which? reveals why inflation holding steady could be a good reason to move your savings.


Why hasn’t inflation changed?

The May inflation rate is influenced by increased prices of motor fuel, as well as air and sea fares, which had fallen this time last year, according to the ONS. It’s thought this is related to Easter falling at the beginning of April this year, in comparison to mid-April last year.

These price rises were offset by reduced costs for games, food and non-alcoholic drinks, furniture and furnishings, plus domestic electricity.

This month’s rate follows a steady decline throughout 2018, after inflation peaked at 3.1% in November 2017.

The ‘ideal’ rate of inflation is 2%, so May’s rate is still a little high, but it hopefully means that people won’t feel the pinch as much as they might have done at the end of last year.

What can I do with my savings to beat inflation?

As prices rise, your savings will be worth less in real terms – but you can combat this by finding an account that pays higher interest than the current inflation rate.

Fixed-term bonds or Isas tend to offer the best rates, although you often have to commit to locking your money away for several years.

The table below shows the fixed-term accounts offering the highest rates.

As the table demonstrates, there are several accounts offering higher rates than inflation, but currently they are all fixed-term bonds.

In fact, Atom Bank’s new 1 Year Fixed Saver offers a higher rate than the top three-year fixed-rate Isa from United Bank, proving that longer terms don’t always mean higher interest rates.

The Which? Money Compare comparison tables let you search hundreds of savings and Isa accounts to help you choose the right deal for your circumstances.

You still have to shop around to find a rate that can beat inflation, but it can be done.

Is it still worth investing in cash Isas?

Interest in cash Isas has waned over recent years.

HMRC statistics found 11.1m adult Isa accounts were subscribed to in 2016-17, down from 12.7m in 2015-16. Of these, the number of cash Isas subscribed to fell by 1.6m, whereas the number of stocks & shares Isas actually rose slightly.

This may be due to the introduction of the personal savings allowance, which means that basic-rate taxpayers can earn up to £1,000 in savings interest a year before tax, while higher-rate taxpayers can earn £500 a year. Additional-rate taxpayers do not qualify for this allowance.

What’s more, savings accounts are consistently beating Isa rates across all types of accounts – and there’s healthy competition with new table-topping accounts launching every month.

In the table above, there’s a 0.53% difference between the highest rate one-year fixed-rate Isa and the highest rate one-year fixed-rate savings account, which is fairly significant.

However, Isas shouldn’t be overlooked altogether. While the rates may be slightly lower, the fact that you have a £20,000 tax-free allowance each year, coupled with the fact that all growth within the Isa wrapper will remain totally tax free, is a huge bonus.

If you’re likely to earn more than your personal savings allowance within the tax year, it’s definitely worth sticking with an Isa.

Save with Which? Recommended Providers

Which? Recommended Providers are companies that have been rated highly by the respondents to our unique customer survey and have products that meet the high standards of our researchers.

RCI Bank offers a 1 Year Fixed Term bond with 1.66% AER, a 2 Year Fixed Term bond at 1.91% AER, and a 3 Year Fixed Term bond at an AER of 2.31% – all of which require deposits of more than £1,000, and which can’t be added to for the term of the bond.

For a more flexible savings option, the provider also has the RCI Bank Freedom Savings Account, which is an instant-access account with a 1.3% AER on balances over £100.

Elsewhere, Coventry Building Society offers several instant-access options. Its Easy Access online account gives 1.25% AER on balances over £1.

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.

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