Updated: Fri, 17 Aug 2012 15:23:23 GMT | By lovemoney.co.uk, writing for MSN Money

How your savings can still beat inflation

After a big fall in June, inflation went back up in July, but it's still possible to get an inflation-beating return on your savings.


How to beat inflation (© Image © Getty Images)

Consumer price inflation went up to 2.6% in July, which is relatively low in historical terms, so you might think it would be easy to find an inflation-beating savings account.

Trouble is, there are actually masses of accounts paying less than 2% - and even if you find an account paying 2.6% or more, you still have to factor in tax.

If you're a basic rate taxpayer, you'll have to pay at least 20% tax on that 2.6% interest, which will take your post-tax return down to 2.08%. If you're only getting 2.08% in interest, the real value of your savings will gradually be eroded away by inflation.

To keep up with inflation, you'll need to earn at least 3.25% interest on your savings. And if you pay a higher rate of income tax, you'll need to earn an even higher interest rate. Look at this table:

After-tax returns on savings accounts for different rates of income tax

 
Tax rateSavings rate before taxSavings rate after tax
20% (basic rate)3.25%2.6%
40% (higher rate)4.33%2.6%
50% (top rate)5.20%2.6%

As you can see, a 50% taxpayer needs to find an account that pays 5.2% interest before tax if they want to keep up with inflation.

Bad news
The bad news is that there are no instant access accounts that pay 3.25% or more. The best instant access account on the market is the Nationwide BS MySave Online Plus account, which pays 3.06%.

So if you want to keep up with rising prices you'll have to lock away your money for at least a year. Then you can start to get an inflation-beating return.

For example, the Saga 2-Year Fixed Rate Savings account pays 3.8% interest a year. Yes, you'll have to lock your money away for two years, and the account is only available for people over the age of 50. But on the plus side, this account beats inflation by 0.55% for basic rate taxpayers.

If you're younger than 50, you can still easily beat inflation if you sign up for the Tesco Bank 2-Year Fixed Rate Saver account. This account pays 3.6% interest and the minimum balance is relatively low at £2,000. That means it's well within the reach of many savers.

If you want to see how these accounts compare with the competition, here are all the top fixed rate bond accounts for three years or less:

Top fixed rate bonds for three years or less

 
AccountAERDurationMinimum depositNotes
BLME 3-Year Premier Deposit Account4%Three years£25,000Sharia'a compliant
AA 3-Year Fixed Rate4%Three years£1Operated by post
Saga 2-Year Fixed-Rate Savings3.8%Two years£1Only available to people aged 50+
BLME 2-Year Premier Deposit Account3.75%Two years£25,000Sharia'a compliant account. No interest, just 'profit.'
Post Office 2-Year Growth Bond Issue 173.61%Two years£500 
Tesco 2-Year Fixed Rate Saver3.6%Two years£2,000 
United Trust Bank 1-Year Fixed Deposit3.46%One year£500 
United Bank UK 1-Year Fixed-Term Deposit3.45%One year£2,000 
Kent Reliance Limited Edition 1-Year Fixed-Rate Bond3.4%One year£1,000 
Close Brothers Select Gold Fixed Account3.4%One year£1,000 
BLME Sharia'a Compliant 1-Year Premier Deposit Account3.35%One year£25,000Sharia'a compliant account.

Higher-rate taxpayers
Of course, none of the above accounts will deliver an inflation-beating return for higher rate taxpayers. Remember an account needs to pay at least 4.33% in interest if a higher rate taxpayer is going to keep up with inflation.

To get that kind of return you could sign up for one of the top five-year bonds. The highest paying bond is the BLME 5-Year Premier Deposit Account, which pays 4.6%. Because this is a Sharia'a compliant account, these payments aren't interest, but are 'anticipated profit'. It's important to note that the minimum balance on this account is £25,000.

So you may prefer the State Bank of India Hi Return Fixed Deposit, which pays 4.5% and only requires a minimum balance of £1,000.

ISAs
Higher rate taxpayers have one other option if they want to beat inflation. They can go for a cash ISA where they won't have to pay any tax.

The top instant access ISA - the Post Office Premier Cash ISA - pays 3.01% tax free. As that's a tax-free return, you're definitely beating inflation.

And you can get higher inflation-beating returns if you go for a fixed-rate Cash ISA. Check out the table below:

Top cash ISAs

 
Account nameInterest rate (AER)Notice/termMinimum depositNotes
Newcastle Champion ISA4.25%Five years£2,012Transfers in from other providers are permitted
BM Savings 5-Year Fixed-Rate ISA4.05%Five years£500Transfers in from other providers are permitted
Halifax ISA Saver Fixed4%Five years£500Transfers in from other providers are permitted
Halifax ISA Saver Fixed3.8%Four years£500Transfers in from other providers are permitted
Post Office Fixed-Rate Cash ISA Issue 73.7%Three years£500Transfers in from other providers are permitted
Santander 2-Year Fixed-Rate ISA3.6%Two years£500Transfers in from other providers are permitted
Post Office Fixed-Rate Cash ISA Issue 73.6%Two years£500Transfers in from other providers are permitted
Julian Hodge 1-Year Fixed Rate ISA3.35%One year£5,100Transfers in from other providers are permitted
Post Office Premier Cash ISA3.01%Instant£500 

So hopefully you're now confident that you can get an inflation-beating return on your savings. The ball is now in your court; get cracking and switch your savings to a top savings account.

8Comments
20/08/2012 08:18
avatar

Makes me laugh.

Government keeps telling people to take out a pension for your retirement and these suggestions for saving your money.

If most people can't afford to live for today. How are they suppose to save for the future? A future that looks bleak given current trends being set by mankind

avatar

The article doesn't mention that a "Bond" is a loan of money to the Bank.  If that Bank should fail, your money could be lost.

 

Which is not really the objective of "saving".

20/08/2012 02:01
avatar

Savings!!!!

That's a bit of a joke.

I just cannot figure out the best place to invest  my surplus cash from the £74.00 pounds a week that I get!!

Penny shares maybe!?

20/08/2012 10:50
avatar
Its a  total waste of time saving and being prudent......when the bust comes because wasters have over borrowed its the savers that get screwed!  Spend while you can as you only live once and you can not be means tested.  Else, take your savings off shore.
20/08/2012 12:15
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Just do what government and celebs do to AVOID paying tax,put your money over seas.THERE ALL AT IT.Good enuf for them,its good enough for us.There shouldnt be diffrent rulings n laws.IF YOU CARNT BEAT UM JOIN UM,they carnt say nowt there doing it themselves.... FACT n TRUTH.
20/08/2012 09:39
avatar
It is good to find out so useful information. Thanks to who ever offers generously some precious insights.
20/08/2012 09:08
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