Five minute finance: Avoid an inflation battering - Savings - News |

News News brings you the latest financial & economic news & reviews of the best products in the UK by our team of money experts.

Five minute finance: Avoid an inflation battering

Five minute finance: Avoid an inflation battering

Category: Savings

Updated: 07/11/2017
First Published: 24/08/2010

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

With inflation stubbornly remaining more than 1% above target at 3.1%, the Governor of the Bank of England, Mervyn King, has once again had to write an open letter to the Chancellor.

The hike in VAT at the start of the year, coupled with rising food and fuel costs, has had a detrimental impact on the finances of all UK households. With a further VAT rise coming into effect at the start of 2011, the situation is likely to get worse before it starts to improve.

The effects of inflation continue to take their toll on savers, but, after months of falling rates, the savings market appears to have reached a plateau.

In order to make sure their savings do not lose any of their purchasing power, a basic rate tax payer now needs to invest their money in a savings account paying at least 3.88%, a level of return that is only available on a handful of longer term fixed rate bonds.

Higher rate tax payers have the unenviable task of needing to earn 5.17%, a rate only achievable on four savings accounts, all of which require another product to be opened at the same time.

In an environment of low savings rates and high inflation, the importance of taking advantage of tax free investments such as ISAs becomes ever more apparent. A fifth of all cash ISAs currently pay a rate at least equal to inflation, the largest proportion of any product area in the savings market.

Savers worried about the effects of inflation might like to consider some of the accounts below:

Aldermore on top

Savers after a longer term commitment are being offered a market leading rate from Aldermore. Its Five Year Fixed Rate account pays 4.75%, with a monthly interest option available for savers looking to secure a regular income. Between £1,000 and £1m can be invested into the bond, which is operated online, by post or by telephone. Once opened, further additions and earlier access is not permitted.

Fix with access

Leeds Building Society has launched a range of new fixed rate ISAs including a five year ISA at 3.50%. Savers can invest from £1 into the ISAs, which accept transfers in. Uniquely, the Fixed Rate ISAs allow savers to access 25% of their initial investment without penalty. Further withdrawals are permitted, subject to a loss of 180 days' interest.

Top bonds

If savers are only looking for a medium term commitment then they could consider the Three Year Fixed Rate Bond from Cheshire Building Society, which pays 4.10%. The bond is operated in branch, online or by post and savers can invest between £100 and £1m into the bonds. Further additions are permitted whilst the issues remain open, but earlier access to funds during the term is not allowed.

AA drives ahead

In uncertain times, savers like to have access to at least a proportion of their money. Although no easy access accounts pay a high enough level to beat inflation, its important savers achieve as high a return as possible. The AA Internet Extra account offers the highest rate on the market at 2.80%, including a 2.30% bonus for 12 months. Savers can invest up to £1m into the account. No notice is required to access funds, but all withdrawals must be made via a nominated account.

Newcastle steps up

Newcastle Building Society has just launched its Five Year Bonds offering rates of up to 4.50%, depending on the amount invested. Savers can invest between £500 and £1m, with the highest rate of interest being paid on investments over £100,000. Further additions are permitted whilst the issue remain open. Access to funds is available during the term, subject to a loss of 120 days' interest.

Find the best savings rates for you - Compare savings accounts

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.