The UK Consumer Prices Index (CPI) measure of inflation fell to 2.3% in November 2018, the Office for National Statistics (ONS) announced this morning.
This is down from 2.4% in October.
If you’re earning less interest than the inflation rate, your savings will be losing value in real terms over time.
Which? explains why inflation has decreased, and how you can get the best possible rate on your savings.
Why has inflation fallen?
CPI inflation tracks the cost of an imaginary ‘shopping basket’ of more than 400 goods and services, from alcohol and flights to children’s clothes and restaurants.
Each month’s inflation rate indicates how the overall price of the basket compares to the same time the previous year.
So, if you were to buy exactly the same items and services in November 2018 as in November 2017, this year you’d spend 2.3% more.
The main factors influencing November’s inflation figure were rising transport costs – particularly motor fuels – as well as price increases for package holidays and catering services.
These price rises were balanced out by downward contributions from clothing and footwear, where prices have fallen by 0.8%.
The graph below shows how CPI inflation has changed over the past five years, peaking at 3.1% in November 2017.
The Bank of England has been tasked with keeping inflation as close to 2% as possible, so that price rises stay in line with wage increases. It adjusts the base rate to help move inflation towards 2%.
In theory, a base rate rise pushes up the cost of mortgages and loans, and boosts savings rates. With consumers having to pay more on loans, and being rewarded for saving, they will be less inclined to spend their money and the reduced demand for goods and services will bring down prices.
How does inflation affect savings?
If your savings are being held in an account that doesn’t match or beat the rate of inflation, your cash will is losing value in real terms.
As goods and services become more and more expensive, you won’t be able to afford as much with the same amount of cash.
So, if your savings account pays less than 2.3%, you might want to consider switching.
Currently, only longer term fixed-rate savings and cash Isa accounts can beat the rate of inflation.
- Find out more: how to find the best cash Isa
Can any accounts beat inflation?
The table below shows the top-rate fixed-term and instant-access savings accounts and cash Isas.
There are five accounts that can beat the current rates of inflation. The links take you through to Which? Money Compare.
|Five-year fixed-rate savings account||Atom Bank five-year fixed saver||2.7%||£50 minimum initial deposit|
|Five-year fixed-rate cash Isa||Shawbrook Bank five-year fixed rate cash Isa bond||2.27%||£5,000 minimum initial deposit|
|Four-year fixed-rate savings account||Vanquis Bank four-year fixed-rate bond||2.5%||£1,000 minimum initial deposit|
|Four-year fixed-rate cash Isa||
|1.8%||£5,000 minimum initial deposit|
|Three-year fixed-rate savings account||Al Rayan Bank 36-month fixed-term deposit||2.4% (EPR*)||£1,000 minimum initial deposit|
|Three-year fixed-rate cash Isa||Shawbrook Bank three-year fixed-rate cash Isa||2.01%||£5,000 minimum initial deposit|
|Two-year fixed-rate savings account||Investec Bank two-year fixed-term deposit||2.35%||£25,000 minimum initial deposit|
|Two-year fixed-rate cash Isa||Shawbrook Bank two-year fixed-rate cash Isa||1.86%||£5,000 minimum initial deposit|
|One-year fixed-rate savings account||Gatehouse Bank one-year fixed-term deposit (Raisin issue)||2.1% (EPR*)||£1,000 minimum initial deposit|
|One-year fixed-rate cash Isa||Shawbrook Bank one-year fixed-rate cash Isa||1.66%||£5,000 minimum initial deposit|
|Instant-access savings account||West Brom Building Society Direct Double Access||1.5%||£1,000 minimum initial deposit. Two withdrawals permitted per year – any more will cause AER to drop|
|Instant-access cash Isa||Virgin Money Double Take Isa||1.45%||£1 minimum initial deposit. Only two withdrawals per year.|
*Expected Profit Rate. Source: Which? Money Compare. Correct 18 December 2018.
Are savings and cash Isas becoming more flexible?
While there are several products in the table above that have strict and tricky terms – such as the instant-access accounts from West Brom and Virgin Money that only allow two withdrawals per year – some accounts are starting to give savers more freedom.
In every case though, it’s important to fully read the terms and conditions so you know what you’re signing up for.
All accounts require a relatively high minimum initial deposit of £10,000, but come with some unusual advantages.
Notice accounts usually offer unlimited withdrawals, but require savers to give their bank a certain amount of notice before the cash can be accessed.
With the Investec Notice Plus accounts, however, you can instantly access 10% or 20% of your funds. But to do so, you also have to sacrifice some of the interest rate.
In practice, this means the 35-day account AER, which starts at 1.4%, would be reduced to 1.35% if you opt for instant access to 10% of your savings, or 1.35% if you want instant access to 20% of the cash.
On the 65-day account with 1.5% AER, access to 10% means a rate reduction to 1.45%, and 20% access would leave you with 1.4%.
On the 95-day account – which usually pays 1.8% AER – 10% immediate access will bring the interest down to 1.75%, while 20% access will make it 1.7%.
You should also factor in that none of the accounts offer the top rates for their notice terms, and the 95-day product is the only one that can’t be beaten by an instant-access account.
Flexible additional payments
Shawbrook Bank’s fixed-term cash Isas – several of which are in the table above – have recently had their rates increased.
In addition to helping your savings grow, you can also make additional deposits during the fixed term.
This is quite unusual, as most fixed-term accounts are locked down until the bond matures – no money can go in or out.
Being able to add money as you go means you earn higher interest on more of your cash, and the money you pay in will remain tax-free within the cash Isa wrapper.
Keep in mind that the amount you can pay in each year must be within your annual Isa allowance of £20,000, and you’re only permitted to pay into one cash Isa in each tax year.
- Find out more: cash Isa rules and allowances
Masthaven Bank has also raised its rates recently, with the AER on its flexible term savings account up by 0.15%.
This savings account allows you to set your own term between one and 60 months.
This could be helpful if you’re saving for a specific date, such as a wedding.
As you’d expect, the longer your savings term, the higher the AER.
If you choose to save for 12 months, you’ll receive 2.05% interest, which is 0.05% short of the current highest rate for this term.
If you opt for 60 months, you’ll get 2.49% AER, which is 0.21% behind the top-rate five-year account, so it’s worth checking whether you could get a better deal elsewhere first.
- Find out more: how to find the best savings account
Save with a Which? Recommended Provider
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’s Freedom Savings Account gives unlimited instant access, pays 1.42% and requires a minimum initial deposit of £100.
The bank has been given top marks for its customer service and regular contact.
Alternatively, there’s the Kent Reliance one-year fixed-rate cash Isa paying 1.55% on a minimum deposit of £1,000. The account also allows further additions.
For longer-term savings, Leeds Building Society’s five-year fixed-rate cash Isa pays 2.05% AER, and requires a minimum initial deposit of just £100. This could be a good choice for those with smaller savings pots.
You can use Which? Money Compare to search through hundreds of savings products.
Please note that the information in the table(s) above is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of the savings account provider before committing to any financial products.
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.