There’s good news for savers looking to protect the long-term value of their money – there are now 325 savings accounts paying higher interest than the current inflation rate.
Rather than a resurgence in savings interest, however, this is mainly due to CPI Inflation for August 2019 plummeting to 1.7%, according to the Office for National Statistics (ONS).
So, where are the best accounts for depositing your cash?
We reveal how many of each type of savings and cash Isa account can beat inflation, as well as the top three rates.
How many fixed-term savings accounts beat inflation?
As the graph below shows, inflation last month hit its lowest level since December 2016, when it measured 1.6%. This means price growth is slowing compared to previous months.
By contrast, savings and cash Isa rates are looking fairly bleak. After slowly rising from the end of 2016, the average has been dropping every month since April 2019.
By August, the rate of inflation was the same as the average savings rates. So, despite the downward trend, it should still be relatively easy to find an inflation-beating account.
The graph below shows how CPI inflation and average savings rates have changed over the past few years, with data from the ONS and Moneyfacts.
Why does inflation matter to your savings? If your money is growing more slowly than inflation, you’ll be able to buy less with the same amount of cash. So seeking out a higher interest rate protects the value of your money.
To help you find the right account, we’ve identified the three highest rates for each kind of savings and cash Isa account.
The best-rate savings accounts
We analysed Moneyfacts data for 1,428 savings and cash Isa accounts, finding 147 fixed-rate savings accounts that pay a higher rate than 1.7%.
All accounts are based on saving at least £5,000, and all duplicate accounts have been stripped out – for instance, if a provider lists an online and branch account as different entries.
The top short-term accounts
No instant-access accounts beat the current inflation rate, though the top-rate accounts pays 1.6% EPR, just 0.1% short.
The shortest amount of time you can lock your money away to beat inflation is one year.
In total, there are 21 one-year fixed-term accounts that equal or beat inflation. We’ve listed the top three below. The links will take you through to Which? Money Compare:
- Al Rayan Bank 12-month fixed-term deposit, 2.07% EPR (Expected Profit Rate)
- Bank of London & The Middle East one-year Premier Deposit Account, 2% EPR
- Gatehouse Bank one-year fixed-term deposit, 1.95% EPR
All accounts listed above require a minimum initial deposit of £1,000.
It’s also worth noting that they all pay what is called an ‘Expected Profit Rate’ (EPR), because they are Sharia-compliant Islamic banks, and pay their customers a percentage of profits rather than interest. The EPR is not guaranteed, though we’ve never heard of instances where an Islamic bank has paid less than the EPR in the UK.
Highest rates for long-term savings
It generally follows that the longer you lock up your money, the higher AER rate you’ll get – but it’s not always the case.
If you’re prepared to commit to more than a one-year term, the top-paying accounts are:
- Gatehouse Bank five-year fixed-term deposit, 2.45% EPR
- Al Rayan Bank 36-month deposit, 2.42% EPR
- Gatehouse Bank three-year fixed-term deposit, 2.35% EPR
Two of the best-rate accounts only require you to commit to a three-year fixed term, exceeding all rates offered on four-year terms, and the majority of five-year terms.
Again, you’re required to save at least £1,000 to open these accounts.
- Find out more: how to find the best savings account
What are the best cash Isa rates?
We found 27 cash Isa accounts that exceed the current CPI rate of inflation, with a minimum fixed term of two years.
To earn the top rates, you’ll have to lock your money away for five years.
The three best-rate accounts are:
- UBL UK five-year fixed-rate cash Isa, 2.01% EPR
- Family Building Society five-year fixed-rate cash Isa, 2% AER
- State Bank of India five-year fixed-rate cash Isa, 2% AER
The minimum initial deposits needed to open these accounts vary. UBL UK asks for £2,000 while it’s £1,000 for Family Building Society and £5,000 for State Bank of India.
- Find out more: how to find the best cash Isa
Cash Isas are also tax-free…
While it’s true that cash Isa rates can all be beaten by their savings account equivalents, it’s worth considering their tax-free status. If your interest is more than the personal savings allowance, or you’re a higher-rate taxpayer, this could cut your tax bill.
You’re restricted to paying in £20,000 in each tax year – known as the Isa allowance – which is the same for everyone.
- Find out more: cash Isa rules and allowances
The top regular savings accounts
We also found 41 regular savings accounts with inflation-busting rates.
However, most come with several caveats, so make sure you can commit before you open one.
The top three rates are:
- First Direct Regular Saver, 5% AER (requires monthly deposits of £25 to £300)
- M&S Bank Regular Saver, 5% AER (requires monthly deposits of £25 to £250)
- HSBC Regular Saver – preferential rate, 5% AER (requires monthly deposits of £25 to £250).
All providers require you to hold another account before you can open a regular saver.
First Direct’s AER lasts for 12 months, then drops to just 0.15%, at which point you should consider moving your savings elsewhere.
You must keep your account for at least a year with M&S Bank to receive the 5% interest, as closing early will mean you’ll only earn 0.2% AER.
To receive the preferential rate from HSBC, you must hold an HSBC Premier or HSBC Advance account.
Both require a fairly high minimum deposit to be paid in each month, so those with low salaries will not be able to use them. The rate will also drop to 0.2% AER if the regular saver is closed within 12 months.
- Find out more: compare regular savings accounts
Table-topping Junior cash Isas
There are 37 Junior cash Isas that pay a higher rate of interest than inflation.
In the 2019-20 tax year, you can save up to £4,368 into a Junior cash Isa, and all interest earned is tax-free.
The three top-rate accounts are:
- Coventry Building Society Junior cash Isa, 3.6% AER
- Danske Bank Junior cash Isa, 3.45% AER
- Darlington Building Society Junior cash Isa, 3.25% AER
Two of these accounts have location-related restrictions. Danske Bank’s account must be opened in-branch, and all branches are in Northern Ireland. Meanwhile, only customers living in certain postcodes can open accounts with Darlington Building Society.
- Find out more: best Junior cash Isas
Top Help to Buy Isas
Help to Buy Isas are savings accounts specifically for first-time buyers trying to save for their first home.
In addition to the AER interest, the government pays a 25% bonus on whatever you save, with a maximum £3,000 bonus being paid when you save £12,000.
There are 28 Help to Buy Isas that beat the current rate of inflation, the top three are:
- Penrith Building Society Help to Buy Isa, 3% AER
- Tipton & Coseley Building Society Help to Buy Isa, 2.95% AER
- Vernon Building Society Help to Buy Isa, 2.85% AER.
There are regional restrictions on all these accounts. You must have a Cumbria postcode to bank with Penrith Building Society; Tipton & Coseley specifies a handful of eligible postcodes; and Vernon Building Society customers must live within 25 miles of Stockport.
The highest rate available nationwide is 2.58% AER from Barclays.
If you want to take advantage of these accounts, you’d better move fast – Help to Buy Isas will be closing to new customers on 30 November 2019.
- Find out more: Help to Buy Isas explained
High interest children’s savings accounts
Children’s accounts tend to have more generous rates than adult’s. Currently, there are 51 children’s accounts that beat the August rate of inflation.
The top three rates are:
- Nationwide Future Saver (existing customers), 3% AER
- HSBC MySavings, 3% AER
- Nationwide Future Saver, 2.5% AER
The Nationwide account is limited to one withdrawal a year. If you take money out more frequently, the rate will drop to 0.5% AER.
We also found some regular children’s savings accounts that pay high interest:
- Halifax Kids’ Monthly Saver, 4.5% AER
- Saffron Building Society, 4% AER
- Barclays Children’s Regular Saver, 3.5% AER.
You have to deposit between £10 and £100 each month into the Halifax account, while the others accept £5 to £100.
No withdrawals are allowed from the Halifax account, whereas any month a withdrawal is made with Barclays, the AER will drop to 1.51%.
- Find out more: best children’s savings accounts
Why it’s important for your savings to beat inflation
CPI inflation tracks the prices of an imaginary shopping basket of more than 700 goods and services.
Each month’s inflation figure shows how prices have changed since the same month in the previous year.
So, as CPI measured 1.7% in August, it means everything in the basket is 1.7% more expensive than in August 2018.
If your savings aren’t growing by at least the same rate, your money’s value will shrink as it won’t be able to buy you as much.
You can browse through hundreds of savings products with Which? Money Compare.
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