Savers are being urged to check the rate they are earning on their cash as inflation rises.
But the good news is that around four in five savings accounts are currently paying more than inflation.
There are 1,850 savings accounts beating the current inflation rate, according to the latest analysis from Moneyfactscompare.co.uk, giving savers plenty of opportunities to protect, and potentially increase, the spending power of their money.
The Consumer Price Index (CPI) rose to 2.9 per cent in July, up from 2.6 per cent in June. Meanwhile, the Moneyfacts average new savings rate stood at 3.63 per cent on 19 August.
That means the average new savings account is still beating inflation, but the gap is not especially large.
How much difference can a better rate make?
The difference becomes clearer when you look at a £10,000 savings pot.
At a rate of 4.5 per cent, £10,000 would generate £450 in interest over a year.
But leave the same £10,000 in an account paying just 2 per cent, and the £200 interest would not be enough to keep pace with inflation.
Caitlyn Eastell, personal finance analyst at Moneyfactscompare.co.uk, said: “With inflation expected to move even higher, savers should pay close attention to where their money is held rather than assuming their existing rate is doing enough.
“Now may be the time for savers to check their rate, and shop around as it could make the difference between their savings growing in real terms or quietly losing value.”
The best easy-access savings rates
For savers who need to be able to get at their money, MoneySavingExpert’s current best-buy list includes several rates of around 4.5 per cent or more.
For smaller amounts, Paragon Bank’s Spring savings app pays 5 per cent on balances of up to £5,000, while Cahoot’s Sunny Day Saver pays 5 per cent on up to £3,000.
For larger balances, Tembo pays 4.55 per cent on up to £20,000. Cahoot’s Simple Saver pays 4.52 per cent, while Saga and Chase offer 4.5 per cent deals subject to their respective conditions.
If you want to avoid introductory bonuses and simply have a straightforward account, Oxbury Bank offers 4.33 per cent, according to MoneySavingExpert’s current rates.
Experts warned savers to check the small print as several of the highest rates include one-year bonuses, introductory offers or balance limits, so the headline rate may not last indefinitely.
Cash ISAs could be worth considering
Cash ISAs can be particularly useful for people with larger savings pots or those who pay higher rates of income tax, because the interest is tax-free.
With normal savings accounts, once you earn above £1,000 in interest you’ll pay 20 per cent tax. If you’re a higher rate payer, it’s 40 per cent tax on everything over £500, and additional rate payers get no allowance and pay 45 per cent everything.
You can put £20,000 in them each tax year, though from next April that will change and you will have a £12,000 allowance – the remaining £8,000 must go into a stocks and shares ISA.
MoneySavingExpert currently lists Trading 212’s cash ISA at 4.56 per cent on new deposits, although most transfers receive a lower rate of 3.6 per cent. Chip pays 4.55 per cent on new deposits and transfers.
Fixed rates offer more certainty
Savers who do not need immediate access to their cash can consider fixing their money for one or more years.
MBNA offers 4.85 per cent on a one-year fixed account, with a minimum deposit of £1,000. NS&I and Vanquis Bank both offer 4.82 per cent.
For two-year fixes, Birmingham Bank pays 4.87 per cent, followed by Recognise Bank at 4.86 per cent and GB Bank at 4.85 per cent.
The highest rates in the current list reach 5 per cent for longer terms. Afin Bank and Investec both offer 5 per cent on three-year fixes, while Afin Bank also offers 5 per cent on a five-year fix. GB Bank’s five-year rate is 4.98 per cent.
Fixed-rate accounts provide certainty because the rate is locked in even if savings rates fall. But the trade-off is that your money is generally tied up for the duration of the fix, meaning you could miss out if better rates become available.
Don’t forget tax – and your longer-term goals
Sarah Coles, head of personal finance at AJ Bell, warns that savers can easily overlook the impact of inflation when they see interest being added to their accounts.
Speaking to The i Paper, she said: “As inflation rises, there’s a real risk that people with their money stuck on miserable rates with the high street banks will lose more of their spending power as time goes by.”
She says it is worth shopping around for better deals, adding that a cash hub can make it easier to react to changes in the market and switch between accounts without having to make new applications.
There are attractive savings rates available, but Coles also warns against putting all your money into cash.
She added: “At times like this it can be tempting to leave all your money in savings, but it’s vital not to overlook the growth potential of investments.”
For people with a five-to-ten-year investment horizon, she says investments tend to perform better than savings. But savers should still keep some money aside for emergencies and short-term spending.
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