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Warning: why the value of your savings is probably going down not up

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You may sleep better at night knowing you’ve got some money tucked away in a savings account, but the bad news is the value of that cash is most likely falling. 

For most of last year, it was near-impossible to find an inflation-beating standard savings account.

A combination of dire interest rates and above-target inflation meant savers had to find more creative ways to grow the value of their money in real terms, such as opting for high interest current accounts.

However, things have started to look up in the last few months.

While they still won’t blow the lights out, interest rates have improved while inflation has broadly ticked down.

Although the latest data showed consumer price inflation edged up slightly to 1.9% in February from 1.8% the month before, this is still below the government’s 2% target and a far cry from last January’s rate of 3%.

This means today, savers need an account paying above 1.9% to make sure their cash grows in real terms. And they have plenty to choose from: there are 209 standard accounts now matching or beating CPI inflation, according to Savings Champion, the rate monitoring site.

In comparison, last January, when inflation was at 3%, not a single standard savings account paid an inflation-beating return.

But the reality is most people’s money will stay in accounts paying below inflation.

That’s because the vast majority of savings cash is sitting in easy access accounts and the best of these pays just 1.5%, 0.4 percentage points below inflation.

If your savings don’t grow at the same rate or above inflation, you won’t be able to buy as much with them in say a years’ time as goods and services will have gone up in price by the rate of inflation.

According to most up-to-date UK Finance figures, in January there was £642.3bn in easy access savings accounts on the high street, which tend to offer very little interest.

Meanwhile, Bank of England figures show there’s £165.9bn in accounts paying no interest at all.

“People feel safer with their money in an easy access bank account, but ironically if they’re in a high street account paying 0.25%, their money isn’t safe at all – it’s actually guaranteed to lose spending power once you take inflation into account,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown.

The safest approach is to have three to six months’ worth of expenses in an emergency fund in a competitive easy access account, Coles suggests.

“Then you can divide the rest of your savings depending on when you need to get hold of them and fix them for the period of time that makes the most sense for you,” she adds.

Best inflation-beating accounts

So, which accounts currently offer the best inflation-beating returns?

Anna Bowes, co-founder of Savings Champion, says: “Charter Savings Bank has a 95 day notice account with a gross rate that matches CPI inflation at 1.90%. But if you want to beat it, with the exception of a handful of interest paying current accounts, you need to tie up your money for at least 12 months.”

The best one-year account is with sharia bank BLME, which pays 2.2%. Other inflation-beating one-year deals include 2.15% from Al Rayan, another sharia bank, and 1.97% from Shawbrook Bank.

If you want a cash ISA, the minimum term you’ll have to go for is two years as there are no one-year cash ISAs that match or beat inflation. The best deal is from Charter Savings Bank, which pays 1.95% on its 2 Year Fixed Rate Cash ISA.

If you have a longer time frame, you can get 2.64% on a three-year standard savings account and as much as 3.05% on a five-year standard savings account both from AgriBank.

Your easy access savings

You won’t be able to eliminate the effects of inflation on your instant access savings, but you can reduce the damaging effects by choosing the best rates.

Bowes says: “If you had £50,000 in an account paying a paltry rate of 0.15%, after five years your £50,000 would be worth £45,852 in real terms assuming an inflation rate of 1.9%.

“However, it you put that £50,000 into the best paying easy access account with Kent Reliance paying 1.5%, while it would still be worth less, you would be more than £3,000 better off – as it would be worth £49,026 after five years.”

Provider Account Name Gross Rate
One year fixed term accounts
Standard Savings Accounts    
BLME 1 Year Premier Deposit Account 2.20%
Al Rayan Bank 12 Month Fixed Term Deposit 2.15%
Shawbrook Bank 1 Year Fixed Rate Bond Issue 58 1.97%
Cash ISAs – Two Years    
Charter Savings Bank 2 Year Fixed Rate Cash ISA 1.95%
OakNorth 24 Months Fixed Rate Cash ISA 1.92%
Shawbrook Bank 2 Year Fixed Rate Cash ISA Bond Issue 28 1.91%
Three year fixed term accounts
Standard Savings Accounts    
AgriBank 3 Year Fixed Term Deposit 2.64%
Al Rayan Bank and Gatehouse Bank 36 Month Fixed Term Deposit 2.50%
Various providers * 3 Year Fixed Rate Account 2.40%
Cash ISAs – Three  Years    
Charter Savings Bank 3 Year Fixed Rate Cash ISA 2.05%
Shawbrook Bank 3 Year Fixed Rate Cash ISA Bond Issue 13 1.96%
Marsden Building Society Fixed Rate Cash ISA (Issue 106) 1.95%
Five year fixed term accounts
Standard Savings Accounts    
AgriBank 5 Year Fixed Term Deposit 3.05%
Gatehouse Bank 5 Year Fixed Term Deposit 2.75%
United Trust Bank 5 Year Bond 2.70%
Cash ISAs – Five Years    
Shawbrook Bank 5 Year Fixed Rate Cash ISA Bond Issue 16 2.30%
United Trust Bank Cash ISA 5 Year Bond 2.30%
Principality Building Society 5 Year Fixed Rate Cash ISA Issue 206 2.13%
* Aldermore, United Trust, Tandem Bank, Arbuthnot Direct, ICICI Bank UK
Source: Savings Champion. Rates correct as at 25/03/2019

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