Exclusive: savings rates hit two-year low

The run of grim news for savers is unfortunately continuing, as Which? reveals average long-term savings rates have now hit their lowest point for two years.

As a result, 33 fewer accounts beat inflation this month compared to September, despite inflation remaining at a modest 1.7%.

The last time savings rates were this poor was September 2017, while cash Isas hit their low in November of the same year.

Is there any good news? Well, thanks to flat inflation growth, you still have 292 options to find an account that outperforms price growth.

Here, we reveal how many of each type of savings accounts and cash Isas can beat inflation, along with the current top three rates.

What is happening to savings rates?

According to data from Moneyfacts, the average long-term savings account pays 1.59% AER, and cash Isas just 1.41% AER.

And things get little better when you look at the top rates on offer.

In September 2017, the top five-year savings account was 2.51% AER - now, the top rate pays just 2.36% AER.

What's worse, the Bank of England base rate has risen from 0.25% to 0.75% between September 2017 and today. While this would normally lead to a surge in savings rates, returns have in fact plunged even lower.

Fixed-term savings accounts see the biggest rate drop

We analysed Moneyfacts data for 1,388 cash Isas and savings accounts, and found 125 fixed-rate bonds that beat the inflation rate of 1.7%, some 22 fewer than last month.

Before locking into a long-term account, keep in mind that inflation is recalculated monthly. If inflation rises in future, your savings account may no longer outperform price growth.

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 best short-term accounts

No instant-access accounts can beat inflation at the moment. The top rate is 1.46% AER, which falls 0.24% short.

To earn above 1.7%, you'll have to lock up your cash for at least a year.

There are 15 one-year fixed-term savings accounts that beat inflation. Below are the top three - the links will take you through to Which? Money Compare:

• Al Rayan Bank, 12-month Fixed Term Deposit, 2.07% Expected Profit Rate (EPR)
• Bank of London & The Middle East, 1 Year Premier Deposit Account, 1.95% EPR
• Gatehouse Bank, 1 Year Fixed Term Deposit, 1.85% EPR.

To save with these providers, you'll need to pay in an initial minimum deposit of £1,000.

All providers here are Sharia-compliant Islamic banks, meaning they pay an Expected Profit Rate (EPR), rather than an Annual Equivalent Rate (AER). As such, the rate isn't guaranteed, though we've never heard of an instance where an Islamic bank has paid less than the EPR in the UK.

Top long-term savings rates

Usually, the longer you lock your money away for, the higher the rate you'll get.

At the moment, however, a three-year fixed-term account is actually trumping the rates offered by five-year fixes, which is great news for those who don't want to commit their savings for half a decade.

Looking at terms of three years or more, the top rates are:

• Al Rayan Bank 36-month Fixed Term Deposit, 2.42% EPR
• UBL UK 5 Year Fixed Term Deposit, 2.36% EPR
• Gatehouse Bank Fixed Term Deposit, 2.3% EPR

You'll need at least £2,000 to open the UBL UK account, and £1,000 for the other accounts.

• Find out more:how to find the best savings account

Cash in on the best cash Isa rates

We found 21 cash Isas that equal or beat the rate of inflation, all of which have fixed terms of three to five years.

This is six fewer than last month, when there were some two-year fixed options that could beat inflation.

The current top three rates are:

• UBL UK 5 Year Fixed Rate Cash Isa, 2.01% EPR
• State Bank of India 5 Year Cash Isa Fixed Deposit, 2% AER
• State Bank of India 3 Year Cash Isa Fixed Deposit, 1.9% AER.

The UBL UK account requires a minimum initial deposit of £2,000, while both cash Isas from State Bank of India require at least £5,000.

• Find out more:how to find the best cash Isa

Tax-free cash Isa benefits

When it comes to cash Isas, it's not just the interest rates you should consider. It's also worth weighing up the tax-free benefits of Isa accounts.

If your interest exceeds your personal savings allowance, or you're an additional-rate taxpayer, you'll have to pay tax on this income.

Isas provide a tax-free wrapper for the full balance. However, you can only deposit up to £20,000 into an Isa account in each tax year.

• Find out more:cash Isa rules and allowances

Top regular savings accounts

We recently wrote about rates being slashed on top regular saver accounts. Nonetheless, there are 42 regular savers that beat inflation. That said, many come with caveats.

Here are the three top-rate accounts:

• M&S Bank Monthly Saver, 5% AER (requires monthly deposits of £25 to £250)
• Kent Reliance 1 Year Regular Savings Account, 3% AER (requires an initial deposit of £25, then monthly deposits of £1 to £500)
• Virgin Money Regular Saver, 3% AER (requires monthly deposits of £25 to £250).

You must hold an M&S Bank current account before you can open the regular saver, which you must hold for a year to receive the 5% AER - closing early will mean you only receive 0.2% interest.

All accounts allow unlimited withdrawals, as long as you still make the required monthly deposits.

• Find out more:compare regular savings accounts

Market-leading Junior cash Isas

There are 37 inflation-busting Junior cash Isas - the same as last month.

In the 2019-20 tax year, you can save up to £4,368 into one of these accounts, and - like adult Isas - all interest is tax-free.

The 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.

There are also some location restrictions: Danske Bank's account must be opened in-branch, and all branches are in Northern Ireland, and only customers living in certain local postcodes can open accounts with Darlington Building Society.

• Find out more:best Junior cash Isas

Highest-rate Help to Buy Isas

Help to Buy Isas are savings accounts specifically for first-time buyers preparing to buy their first home.

In addition to AER interest, the government pays a 25% bonus on your saving, meaning you could get up to £3,000 extra when you save £12,000.

There are 22 Help to Buy Isas that can beat inflation this month. The top rates are:

• Penrith Building Society Help to Buy Isa, 3% AER
• Vernon Building Society Help to Buy Isa, 2.85% AER
• Darlington Building Society Help to Buy Isa, 2.8% AER.

You can open any of these accounts with just £1, but there are regional restrictions. You need a Cumbria postcode to save with Penrith Building Society; Vernon Building Society customers must live within 25 miles of Stockport and Darlington Building Society is restricted to certain postcodes.

The Barclays Help to Buy Isa pays 2.58% AER, which is the highest rate available nationally.

• Find out more:Help to Buy Isas explained

Top-paying children's savings accounts

Much more generous than adult's accounts, there are 39 children's savings accounts that can beat inflation.

The top three rates are:

• Nationwide Building Society Future Saver (existing customers), 3% AER
• HSBC My Savings, 3% AER
• Virgin Money Young Saver, 2.25% 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 Children's Regular Saver, 4% AER
• Barclays Children's Regular Saver, 3.5% AER.

You have to deposit between £10 and £100 into the Halifax account each month, while the others accept £5 to £100.

You can't make any withdrawals from the Halifax account, and withdrawals from Barclays will result in an AER drop to 1.51%.

• Find out more:best children's savings accounts

Why should your savings interest rate beat inflation?

Inflation last month held steady, remaining at its lowest level since December 2016, when it measured 1.6%. This means price growth is slowing compared to previous months.

However, average savings rates are falling even faster, and have now dipped below inflation.

The graph shows how CPI inflation, and average cash Isa and savings rates have changed over the past few years, using data from the ONS and Moneyfacts.

When your nest egg is earning less interest than inflation, its value is eroding over time.

As prices rise, your money won't be able to buy as many goods and services, effectively losing value in real terms.

It's therefore important to find a home for your money where it can outstrip, or at least keep pace with, inflation growth.

_{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? Money Compare is a trading names of Which? Financial Services Limited.}