Savings rates continue to improve, however, due to a dramatic rise to inflation, not one standard savings account can beat its eroding power.
The Consumer Price Index (CPI) rose to 3.2% during August 2021 up from 2.0% in July 2021. This is the highest level seen since records started in 1997. There remains no single savings account that can outpace inflation. The highest cash savings rate available right now is from Atom Bank at 1.86% for a five year fixed rate bond. This is an improvement compared to 18 August 2021 when the top rate was 1.72% for a five year fixed deal. But, while rates are increasing they are lagging far behind the pace of inflation and even the best rates just prior to the start of the pandemic would not have kept pace. On 18 September 2019 the top return in the market over five-years was 2.45%.
Those needing to save into a cash ISA face even worse news with rates here only reaching 1.50% for a five year fixed rate cash ISA. This means that savers should only use cash ISAs if they are likely to exceed their personal savings allowance and as a result could face paying tax on their interest income.
Rachel Springall, Finance Expert at Moneyfacts.co.uk, said:
“Savings rates have improved vastly since last month which will be great news for consumers looking for a competitive return on their cash. However, inflation overshadows the positive shift, as the latest figure of 3.2% is the largest rise month-on-month since records began and not one standard savings account can beat its eroding power. There is an expectation for inflation to stay above the Bank of England target of 2% for some time yet, but it is vital savers do not become apathetic as they could miss out on some of the best rates we have seen all year.
“Locking cash away for longer may not be feasible for some, indeed consumers may be reluctant to invest longer than a year at most due to the impact of the Coronavirus pandemic on their financial health. However, savings providers are keen to draw in business and fixed rates have been rising substantially in recent months. Savers can now get a one-year bond paying 1.50% (Atom Bank) but a year ago savers would have had to tie their money up for five years for a rate nearest to this return. Those who are averse to a fixed account will find easy access rates have improved since last month, but there is much more room for improvement as a year ago, savers could get a rate of 1.20% (Skipton Building Society).
“ISA’s are still worth considering for any saver yet to use their tax-free allowance, due to their longer-term advantages, and rates are thankfully rising in this arena. However, there remains a notable gap between fixed-rate ISAs and fixed-rate bonds. It would therefore be sensible for savers to compare the rates carefully and consider their Personal Savings Allowance. One of the savings providers to cause a stir in the fixed ISA market recently was Secure Trust Bank, it now leads both the two- and three-year fixed ISA sector with rates at 1.15% and 1.25% respectively.
“Keeping abreast of the changing savings market is vital, as savers could stand to miss out if a deal has a short shelf life or becomes oversubscribed quickly, so signing up to rate alerts and newsletters is wise. Due to the refreshing change to the market, it would not be too surprising if some savers decide to wait a little longer in the weeks ahead expecting more improvements to surface.”