Inflation peril

Steer for the best returns

Inflation has risen to 2.3pc in recent months and just one savings account pays enough to beat it – and it means you have to lock your money up for five years. Customers who are able to tie up funds for five years with Ikano Bank will earn 2.35pc over the term. The other 739 savings accounts on the market fail to even match the rate of inflation, according to data firm Moneyfacts.

The average easy-access account pays just 0.15pc, according to the Bank of England. Based on savings of £15,000, savers would earn £22.50 in a year.

However, with inflation at 2.3pc, their balance of £15,022.50 would be whittled down to £14,684.75 in real spending terms. This would mean an effective loss of £315.25.

The same £15,000 put into the top easy-access account from RCI Bank, which pays 1.1pc, would see their interest shrink by £175.95.

Even the best-paying Isas and fixed-rate bonds fail to provide an inflation-beating home for savings, as shown in the chart below.

Ikano Bank’s five-year bond, paying 2.35pc, is likely to leave savers disappointed. Those who have £3,000 to save would earn £70.50 after a year. However, this falls to £1.50 after the effect of inflation is taken into account.

Experts expect next month’s inflation figures to be higher, peaking at 3pc before the end of the year, spelling more bad news for savers.

Current accounts and regular savers

There are a number of current accounts and monthly savers that beat inflation – but all come with restrictions.

For example, Nationwide’s FlexDirect current account pays 5pc interest on balances up to £2,500 for 12 months. Savers must credit the account with £1,000 a month. After a year, the rate drops to 1pc.

Tesco Bank offers 3pc on balances up to £3,000 – it has guaranteed this rate until 2019. Again, criteria applies – customers must pay in £750 a month and set up three direct debits.

TSB pays 3pc on a smaller balance of £1,500, plus cashback up to £10 a month, as long as the account requirements are met. To earn the interest savers must make monthly deposits of £500 and sign up for internet banking, paperless statements and paperless correspondence.

For the cashback, customers must set up two direct debits to earn £5 a month. Those who make at least 20 monthly debit card transactions will get an additional £5.

Regular savings accounts also offer some of the highest rates on the market, but only allow customers to pay in small monthly deposits.

Nationwide, First Direct and M&S Bank all offer 5pc on monthly payments of up to £500, £300 and £250, respectively – but only for a year. Those who want to open one of these regular savings accounts must

The average easyaccess account pays just 0.15pc, with inflation at 2.3pc

first open a current account with the provider.

Nationwide customers must already hold or open an account in the “Flex” range. The regular saver will only pay the top rate for a year. Then it turns into a Flexclusive Saver account, or its nearest equivalent, such as the instance-access account, which currently pays just 0.1pc. Withdrawals are permitted.

First Direct’s regular saver is only available to those who open its 1st Current Account.

Partial withdrawals are not allowed – those who need access before the end of the 12-month period will see the interest rate drop to 0.05pc. This rate also applies when the 12-month term comes to an end.

M&S Bank requires customers to use its current account with two direct debits set up before they can open its regular saver. Access during the 12 months is not allowed.

Santander’s Regular eSaver also offers 5pc on £200 a month – but only for its 123 customers and those who use its Select service.

The price of the weekly shop is rising as inflation hits 2.3pc, but just one savings account pays a higher interest rate than this