The best savings accounts

Any sensible saver should assess their accounts once a year to check their interest rates and see if they could get a better rate elsewhere. It’s especially important to act this year as soaring inflation means that the value of your savings is likely to be shrinking rather than growing.

Living costs have soared recently. Inflation as measured by the consumer price index (CPI) hit 5.4% in December. That’s bad enough. But if you use the retail prices index (RPI) – a variation of which used to be the basis of the Bank of England’s inflation target – then the cost of living is rising at an annual rate of above 7%. 

In an ideal world the interest you earn on your savings would be higher than inflation so that your money grows. Yet at the moment there isn’t a single savings account with an interest rate anywhere near 5.4%, let alone above 7%, meaning that everyone’s savings are shrinking in “real” (after-inflation) terms. 

What are the alternatives to savings accounts?

Consumer price inflation measures how rapidly the price of a representative “basket” of day-to-day goods and services – from milk and sanitising hand gel (a recent addition, you won’t be surprised to hear) to hotel stays and haircuts – is increasing. “Inflation is like a tax on savers,” Steve Webb, former pensions minister and now partner at LCP, tells The Daily Telegraph. That’s bad news when millions of us have money “sitting rotting” in cash.

A tiny bright spot for savers was the Bank of England’s decision to raise the UK’s key interest rate in December from 0.1% to 0.25%. But so far “only four financial firms have passed on the full rise to all, or nearly all, of their variable-rate savings account customers”, reports Rupert Jones in The Guardian. And in any case, the difference is negligible.

As a result of all this, savers face tough choices when it comes to maximising returns. If you have money tucked away that you won’t need for at least five years, you may want to consider investing it. Over sufficient time, history suggests that a well diversified portfolio should beat inflation, says Myron Jobson from Interactive Investor. “Even a ‘middle-of-the-pack’ fund is likely to compare favourably with cash over the long term, so you don’t need to be an expert stockpicker to benefit.”

Securing the best interest rates

However, for any money you need to be able to access in the short term, your only option is to try to minimise the damage inflation will inflict. This means shopping around for the best possible interest rate. The highest rates tend to be paid on the longest fixed-rate accounts. But now may not be the time to lock your cash away – even opting for a five-year account will only get you a 2% rate. 

So, where should you stash your cash? If you want instant access to a lump sum, your best option is Shawbrook Bank’s Easy Access – Issue 28. It pays 0.67% and you can make unlimited withdrawals. If you want the convenience of app-based banking, Atom Bank’s Instant Saver pays 0.65%.

If you don’t need your money for a year, you can boost your return to 1.36% with Investec Bank – but you’ll need to deposit £5,000. Lock up your money for two years, and your return will only nudge up to 1.62% with the best rate from Charter Savings Bank. If you’re still building a savings pot, look at a regular savings account. NatWest has a digital regular saver which pays 3% on balances up to £1,000. It has unlimited withdrawals, but you can only pay in £50 a month.

Also keep an eye on National Savings & Investments (NS&I). The government-backed savings institution passed on last month’s rate rise, but could be set to raise again. That’s because it has an official target to attract deposits of £6bn in the 2021-2022 tax year. In October it had only raised £0.6bn – so it may boost rates to help it hit its target.