The latest official figures show the Consumer Price Index (CPI) measure of inflation remained stable at 2.4% for October. The value of the pound in your pocket is not falling as fast as earlier in the year.
But what about the pound in your savings account? Is there anything you can do to stop it being whittled away by inflation?
The answer is ‘yes’.
The easy way to beat inflation
To beat inflation, you simply need to find a savings account that pays more than 2.4%.
With the Bank of England base rate just 0.75%, accounts that do are few and far between. It is possible to get 2.75% at time of writing – but only if you are prepared to tie up your money up for seven years.
Many of us might feel that is too long to tie up our money, and that if we can afford to be separated from it for seven years, we might be better off investing. True, investing carries the risk of losing our capital which savings do not. But it does have potential for much higher returns – which could still beat inflation even if it does go back past the 3% point it reached earlier this year.
A more demanding solution
Rates on savings accounts offering instant access to cash are improving but they remain frustratingly unrewarding .
The best you can get on an instant access account is probably around 1.5%. The conventional wisdom is that to get the best returns on cash savings, you need to tie them up for a long period, usually 3 years or more.
However, this may no longer be the case.
For an inflation-beating rate and easy access, a high interest current account could help. Some currently offer rates of up to 5% and easy access to your cash.
But all come with strict criteria. At the very least, you will need to deposit a minimum amount each month to ensure you can get that headline grabbing top rate of interest.
You might also find that there are limits on the balance you can earn interest on. Making 5% on the first £1000 is a lot less attractive if you would only make 1.5% on anything above it.
However, if you can meet eligibility criteria and are disciplined enough, these accounts are a great choice.
What about regular saving?
Some regular saver accounts offer headline-grabbing rates of 5% or more for the first year.
You will need a current account with the bank or building society, and to make regular deposits each month.
But your savings will not actually have earned 5% after a year. The headline rate may be 5% AER, you actually get approximately half that.
If you put in £300 a month, you would save £3,600 over the year. But only the first £300 deposit will earn 5%. Subsequent monthly deposits only earn a proportion of 5% depending on the time left to run. The last months £300 will only earn your 5% divided by 12, or around 0.4%.
What can you do?
If you want inflation beating returns from savings, the answer is to shop around, and keep your money on the move. Find the accounts offering the most attractive introductory rates and bonuses, save tactically to maximise your returns, and move on to the next deal as soon as the bonus period is over and the rewarding introductory rate – which can be 5% or even more – comes to an end.
Our savings rate comparison page can help you find the best rates.
The value of investments can fall as well as rise and you may get back less than you invested.
The Financial Conduct Authority does not regulate deposit accounts.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
yourmoney.com – I opened a 5% regular saver account but the interest earned is much less – why? – 18th October 2017
yourmoney.com – How to get 5% interest without tying up your savings for years – 25th October 2018