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Savers will still struggle to make a real return on their money despite today's fall in inflation, a comparison website said.
Although the CPI, the government's favoured inflation index, fell slightly from 3.1% in December to 3% in January, there are very few savings accounts paying enough interest to enable a tax-paying saver to beat inflation. A basic rate taxpayer would need to earn 3.75% and a higher rate taxpayer 5% to beat inflation at 3%.
According to Andrew Hagger of comparison site moneynet.co.uk there are very few savings accounts on the market paying high enough rates of interest. "Although a limited number of best-buy products allow basic rate tax payers to achieve a positive return on their savings in real terms, they are in the minority," he said.
Hagger said the average rate on variable rate savings accounts (assuming a £500 balance) is exactly 1%, while the average rate for a cash Isa with a £3,600 balance is 1.63%, meaning the vast majority of savers are seeing their money eroded over time. A cash Isa needs to pay interest at more than 3% to beat inflation, as interest is paid tax-free.
Where to now?
The best rates on taxable savings accounts are on fixed-rate bonds. ICICI's one-year bond pays 3.9% and requires a minimum deposit of £1,000. The Indian bank comes under the Financial Services Compensation Scheme, which guarantees savings of up to £50,000. Derbyshire and Cheshire building societies are both paying 3.75% and require a minimum of £5,000 for their one-year bonds.
The choice is greater when it comes to cash Isas paying more than 3%, although the majority only exceed the inflation rate by a small margin. Dunfermline building society pays 3.75% fixed until 2011, with a minimum deposit of £100, while Norwich & Peterborough Building Society pays 3.3% for one year (the full £3,600 allowance must be deposited). Nationwide building society also pays 3.3% for one year with an opening balance of £1.
Those who want to save regularly should look into regular savers cash Isas. The Saffron Building Society's regular saver Isa pays 7% fixed on deposits between £25 and £300 per month. However, Hagger warned: "If you miss a payment your account will automatically switch to an easy access Isa which currently pays 0.85%."
First Direct is paying 7% fixed for 12 months on its regular saver Isa on payments of between £25 and £300. But the Isa is only available to those with a 1st current account, which comes with a £1,500 monthly funding requirement, and no partial withdrawals are allowed in the first 12 months. If you need to close the account to access your money you will only be paid First Direct's cash e-ISA rate, which is currently 1.24% gross.
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