Despite a fall in the annual cost of living, there are still only three mainstream savings products which beat inflation.
There are only three savings accounts on the market, out of a grand total of 840, which beat August's annual rate of inflation of 2.7%.
Two of the accounts are five-year fixed rate Cash ISAs, from Leeds and Skipton Building Societies, and the other is a seven-year fixed rate savings account from Skipton.
Bad news for savers
A year ago, there were 129 inflation-beating Cash ISAs. Now there are just two.
They both pay 3% and are fixed for five years with no early access available without incurring a penalty. If you take money out early of the Leeds account you’ll lose 180 days interest; with Skipton this increases to 240 days' lost interest.
Savings rates have fallen dramatically in the past 12 months to an average of 1.70% for Cash ISAs, compared to 2.39% in 2012.
[SPOTLIGHT]This means £10,000 invested five years ago would now have the spending power of £8,844, when taking into account average interest and a tax rate of 20%, according to financial data company Moneyfacts.
After August's inflation fall taxpayers paying 20% now need to find a savings account paying at least 3.38%, while those on a higher rate of 40% need an account paying 4.5%.
This is largely due to the Government’s Funding for Lending Scheme (FLS), which has given providers cheap access to money so they no longer depend on savings deposits.
The best Cash ISAs
If you’re not willing to part with your money for five years there are other Cash ISA options around, although they all pay less interest.
Our comparison tables give a fuller view of the market but here I’ve listed four alternatives available.
| Accounts | Rate | Starting deposit | Fixed period | Notes |
|
Leeds BS Five-Year Fixed-Rate ISA (with 25% access) |
2.75% |
£100 |
(fixed until 31st October 2018) |
Transfers and new subscriptions. |
|
Skipton BS Online Five-Year Fixed-Rate ISA |
2.50% |
£500 |
Five years (fixed until 11th September 2018) |
Transfers and new subscriptions. |
|
United Trust Bank Five-Year Fixed-Rate Cash ISA |
2.45% |
£5,000 |
Five years |
Transfers and new subscriptions. |
|
Coventry BS Three-Year Fixed-Rate ISA |
2.35% |
£5,760 |
Three years (until 31st May 2016) |
New subscriptions only. |
Inflation-beating savings accounts
The main problem with Skipton's 3.5% account is that you’ll need to lock in your savings for seven years, which won’t be suitable for most people.
But again if you go for an account with a shorter fixed period, the interest rate will be muh lower. The best rate you’ll get if you commit for five years comes from Secure Trust Bank at 3.01%. Leeds and Skipton also have five-year accounts paying 3%.
Our article The best fixed-rate savings bond rates has more details on all the best buys right now.
What next for savers?
It’s good news inflation is falling but there is still a long way to go before savers start to see any real improvement. Funding for Lending has destroyed savings rates and the fact there are just three that beat inflation is an indication of how bad things have become.
Looking forward there doesn’t seem to be a definite end to this misery in sight. Funding for Lending was due to end in January 2014 but was extended earlier in the year until 2015. Providers are slowly starting to bring in some new accounts, such as those from Leeds BS, but things are moving at a snail’s pace.
Other options for better returns include: trying your hand at peer-to-peer (P2P) lending, which promises average returns of 5%; moving to a high-interest current account; paying down your mortgage; or getting into the stock market. But the real issue here is the limited number of savings accounts on offer and at the moment there doesn’t seem to be any sign of things improving.
Thanks to Moneyfacts for their help with this article