The 38 savings accounts that beat inflation

Inflation is now low enough for savers to keep their cash ahead of price rises in any one of 38 accounts.

January is not a month known for its financial jollity. But among the mandatory Christmas debt figures and disappointing sale results lurked one piece of good news for the first month of 2012.

Inflation fell once again in January, down to 3.6% on the Consumer Prices Index (CPI), its lowest level since November 2010.

This fall has thrown a lifeline to savers by pushing 38 fixed rate accounts above the level needed to keep your cash ahead of inflation.

Bonds

According to moneyfacts.co.uk, there are now seven regular fixed rate savings bonds that exceed 4.50%: the threshold for offering a real return above inflation after tax is deducted. If you pay at basic rate, that is. Predictably, they are all five-year fixed term bonds.

Scottish Widows offers the best rate. You’ll earn 4.70% on the bank’s five-year fixed term deposit account. However you will have to deposit a minimum of £10,000. BM Savings offers the next best deal with a 4.65% account that has a far more accessible minimum deposit limit of just £1.

Clydesdale and Yorkshire Banks five-year accounts have a minimum deposit of £2,000 and pay out at 4.63% while the AA’s five-year bond has a 4.60% rate and a low minimum of £1.

Vanquis Bank is also worth a look if you have £1,000 or more to deposit. Its five-year high yield account pays out at 4.51%. And the group of seven is finished off by Saga’s 4.50% five-year account. It has a minimum deposit of £1, but is only available to over-50s.

However the moneyfacts.co.uk data actually misses off two of the best inflation-beating deals.

BLME’s Sharia-compliant accounts pay out an ‘anticipated profit rate’ rather than an interest rate (take a look at this article on Islamic banking for some more information). The bank’s four-year account has a rate of 4.50%, while the five-year account pays 4.80%. The downside is both deals have a lofty minimum deposit of £50,000.

The remaining accounts identified by moneyfacts.co.uk as inflation beating are all ISAs.

Long term ISAs

ISAs pay out interest tax-free. This means that you need an interest rate of just 3.60% (equal to CPI) to keep your savings ahead of inflation. According to moneyfacts.co.uk, 31 fixed rate cash ISAs rise to this challenge.

The top paying accounts are two four-year ISAs. Clydesdale and Yorkshire Bank’s Fixed Rate Bonds running to 29 January 2016 both offer 4.40%. You will need to deposit a minimum of £2,000 but transfers in from other accounts are allowed.

The next best deals are five-year ISAs from BM Savings and Halifax paying out at 4.25% (4.17% for monthly interest) and 4.20% respectively, both with a £500 minimum.

Shorter term ISAs

If you don’t fancy tying your cash up for a full five years, there are a handful of two- and three-year cash ISAs that offer a lower – but still inflation-beating – return.

There are three two-year ISAs that will keep up with CPI inflation, the best of which is the 3.65% Nottingham BS account. The deal has minimum balance of £500 and transfers are allowed.

The Post Office and BM Savings also have 3.60% two-year accounts. Both allow transfers in from other ISAs. The Post Office account has a £500 minimum. The BM account has a £1 minimum.

NatWest and RBS offer the best three-year ISA. The Preferential Fixed Rate pays out at an inflation-crunching 4.12% with a £1,000 minimum. However to be eligible for this deal you’ll need to transfer a balance from another ISA provider. This can then be supplemented by deposits.

If you are not able to meet this requirement NatWest does offer a regular fixed rate ISA that still beats inflation with a rate of 3.80%. Again, the minimum deposit is £1,000. However this ISA isn’t actually the best three-year ‘no-strings attached’ deal on the market. Cheltenham & Gloucester comes in top with a 3.90% ISA. Transfers in are accepted and the minimum is £100.

A full list of inflation-busting accounts can be found at the bottom of this article.

Inflation-linked bonds: still worth it?

Over the past few years, rapidly rising prices have seen many savers turn to bonds with interest rates pegged to inflation. But while these deals offer an increasing return when inflation rises, the rate also shrinks when inflation falls. So with price rises slowing, are inflation-linked bonds still a wise choice?

One of the most popular linked bonds is from the Post Office where the interest rate is linked to the higher Retail Price Index (RPI) measure of inflation. RPI, which includes mortgage interest payments, also dropped in January: it fell down to 3.9%.

The three-year Post Office bond pays 0.25% over the RPI inflation figure, while the five-year bond offers 0.50% over RPI. Prior to January’s inflation drop, the bonds paid out at 5.05% and 5.30% respectively. After income tax this pushed both rates down below the RPI inflation figure. However the five-year rate remained half a percentage point higher than the threshold needed to make a real return on CPI after tax.

Now inflation has dropped the three-year account only pays 4.15% and five-year account is at 4.40% - both below the 4.50% threshold needed to make a real return on CPI after tax. And if inflation continues to fall, your returns will drop even further.

The inflation-busting 38

Here are all 38 fixed rate Cash ISAs and savings accounts that currently beat inflation (savings accounts assume a 20% income tax rate):

Source: moneyfacts.co.uk, lovemoney.com and bank websites. All information correct on Friday 24 February 2012.

More: The best high-value fixed bonds | The best new medium-term bonds and ISA savings accounts