Top 13 inflation-busting savings accounts

Inflation figures may have dropped but is it any easier for savers to earn a return which beats inflation?

The odds are really stacked against savers right now. Not only is inflation way above the government’s 2% target, but the base rate remains stubbornly low - stuck at 0.5% for the sixteenth month in a row.

This means the rates available on savings accounts are low while inflation is high, eroding the real cash value of your savings with every passing day.

But there is a glimmer of good news. In the year to June CPI (consumer prices index) inflation fell to 3.2%, from 3.4% in May. RPI (retail prices index) also fell, to 5% in June, down from 5.1% in May.

So, inflation by both measures has fallen slightly, but will this provide any respite for savers? For a basic rate tax payer to beat CPI inflation they would need a savings account with a rate of 4%. Luckily, there’s a whole range of accounts which will help you beat - or at least match - CPI inflation.

For higher rate taxpayers it’s a little more tricky since they will need a rate of at least 5.33%.

So, let’s take a look first at the accounts which can provide savers with a rate of 4% or more:

Which savings accounts pay 4% or more?

There’s plenty of choice for beating inflation if you want to take out a long-term fixed rate bond. But it will mean you’ll have to be prepared to tie your money up for three to five years.

The ICICI 3 Year Fixed Rate Bond pays a pretty decent rate of 4.15%, and requires a minimum deposit of £1,000. No additional deposits, withdrawals or early closures can be made during the fixed term. There’s also four-year version of the bond, but bizarrely this pays the same rate of 4.15% even though your money is locked away for an extra year.

Other four years bonds which pay more than 4% include the Aldermore 4 Year Fixed Rate Account which pays 4.25%, as does the Nottingham Building Society Fixed Rate Issue 87. You can also get the same 4.2% rate from the State Bank of India Hi Return Fixed Deposit.

Five year bonds

If you’re happy to tie your cash up for even longer, you can get even better rates with the market-leading ICICI 5 Year Fixed Rate Bond. This time you can get a rate of 4.75%. The same rules apply to all ICICI bonds, namely no extra deposits, withdrawals or early closure and you must open the account with £1,000 plus.

Other names in the frame over a five-year term include Yorkshire Building Society Fixed Rate Bond which pays 4.6%, but you should note this is a branch-based account only. Meanwhile, the Aldermore 5 Year Fixed Rate Account pays 4.56%, and finally the AA 5 Year Fixed Rate Savings offers 4.55%.

You should remember with all these accounts the idea is to leave your money totally untouched for the duration of the term. You may be able to make partial withdrawals, or close the bond early if necessary, but you’ll most likely be charged with a pretty heavy exit penalty. You should check the terms and conditions of any bond thoroughly first before committing yourself.

Are stepped rate bonds the answer?

Going for a long-term bond is not without risks. Think about it this way: How would you feel if you fixed your rate at 4.75% for the next five years, but soon afterwards interest rates stage a dramatic recovery, the base rate shoots back to 5% and new five-year bonds start paying 7% again. Suddenly, your 4.75% rate isn’t looking so great after all.

Of course, this isn’t my prediction on rates going forward at all. But I think if you tie your money up over several years, there’s a distinct possibility your return could get left behind.

If this concerns you, why not think about choosing a stepped bond instead?

With these accounts the rates are guaranteed to increase every year which should help you keep pace with the competition once interest rate begin to improve. That said, since we don’t know what will happen with rates going forward no promises can be made.

Bearing that in mind, let’s take a look at the best stepped bonds around right now:

Top stepped bonds

NatWest/RBS 3 Year Bond is available to savers with £5,000 or more to put away. In the first year, you’ll earn a fixed rate of 2%. It’s true this is pretty low given that the bond doesn’t allow access, but if you can put up with that, the rate will step up to 4% the following year, and a far more impressive 6% in year three.

Roughly, the NatWest/RBS bond pays 4% a year, with the total amount of interest running to £622.24 over three years. This compares pretty well with the market-leading ordinary three year bond from ICICI which pays 4.15% every year. The total interest from this account is slightly higher at £648.69 based on savings of £5,000.

If you like what you hear, the NatWest/RBS bond starts on 6 September 2010. It’s a limited issue so it may be withdrawn from the market sooner. Deposits made into the bond before 6 September will earn a rate equivalent to the base rate - i.e. 0.5%.

Recent question on this topic

• jaclyn asks:

  I have £2.5k in my current account, that I won't need until September this year - is it worth putting it in a savings account?

  • 
    MikeGG1 answered "By the time tax is taken off you are looking at under £10 net interest. Is it worth the..."
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To qualify for the bond you either need to be an existing current account holder or open one of these savings accounts for your interest to be paid into.

The bond matures on 6 September 2013 and no withdrawals are allowed. Early closure will result in a loss of 270 day’s interest.

Meanwhile, the alternative choice from Nationwide is more restrictive since it’s only open to Flex Account customers, so I’m afraid this will bar many savers.

Other alternatives

There are two other accounts which each pay a rate of 4% which may be worth considering. The first is the Lloyds TSB Classic with Vantage account which pays 4% if you have a balance of between £5,000 and £7,000. To qualify, you'll need to pay in at least £1,000 a month and stay in credit.

A second option is the new 12 Month Fixed Rate Regular Saver from Saffron Building Society. This accounts pays 4% fixed on monthly savings of between £10 and £200. And, unsually for a fixed rate account, you'll also get instant access to your cash without penalty. Watch out for an article devoted entirely to this new product later in the week.

So you can see it is possible for savers, who are basic rate taxpayers, to beat current CPI inflation with these savings accounts.

There's no question that beating inflation and tax to earn a real return on your cash is a real challenge these days. It was much easier to achieve with a tax-free Index Linked Savings Certificates from NS&I which always pay a rate equivalent to the RPI + 1%. But unfortunately, these accounts have recently been withdrawn which is a huge blow to savers. Let's hope NS&I reintroduce them soon.

Compare savings accounts at lovemoney.com. All the savings account mentioned in this article are either available in our comparison tables or can be found on the ‘search all accounts’ tab.

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