Savings rate rises continue to lag behind inflation | moneyfacts.co.uk

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Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 15/09/2021

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.”

Investments as an option to beat inflation

A combination of low cash savings rates and rising inflation could make investing a more attractive option for some savers. Investment returns have consistently out performed cash savings, but they do come with significantly greater risks including the loss of capital and returns are not guaranteed. In August we reported that the top five ISA unit trust funds had achieved returns over the past 12-months had seen returns of between 61% and 84%.

Savers can use an investment platform and open an account to make investments into funds and into shares on the stock market. This includes the option to invest using an ISA wrapper - savers should note the maximum investment allowed into an investment ISA is £20,000 per tax year.. Alternatively savers can look to open a specific stocks and shares ISA.

Feature: stocks and shares ISA providers

Provider

Min monthly investment

Number of funds available

 

Interactive Investor

£25

3,000 plus

Find out more

Barclays Smart Investor

£0

2,000 plus

Find out more

Foresters Friendly Society

£50

1

Find out more

BMO Asset Management

£50

10

Find out more

The value of investments can go up as well as down, and investors’ capital is at risk. Management fees have been included in this article, but other fees may apply. Investors should check all fees with their financial adviser, investment platform or provider before making any investment.
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