How Does Inflation Affect Savings?

High living costs mean it’s more important than ever for savers to seek out the best possible returns rather than leaving their money languishing in accounts paying paltry rates of interest.

Although inflation fell in June to 2.6%, due mainly to lower fuel prices, it is widely expected to stay high for the foreseeable future and remains well above the government’s 2% target.

However, last month’s surprise fall combined with slow economic growth in the UK has dashed hopes that the Bank of England will raise interest rates imminently.

Savers can benefit from increased rates

Despite this, according to Anna Bowes, director at independent savings advice website, several providers have raised their savings rates in recent months, so savers don’t have to wait for a base rate increase to benefit from higher returns.

“The link between the Bank of England base rate and rates being offered to savers has long since been severed and so far in 2017, we’ve seen lots of positive activity – primarily from the ‘challenger banks’ – names many will have not heard of but without whom, the savings market would have been even more dismal.

“Since the end of last year, the best easy access rate available has risen by 25% and fixed rate bonds have risen even more. Best buy one-year fixed rate bonds are up by 36% and three-year bonds are up by 38%, so you can earn well over 2% gross now – still not more than inflation, but better than the high street.”

The best one-year fixed rate bond is currently from Shawbrook Bank, and pays 1.90% on a minimum investment of £1,000, whilst the best two-year fixed bond is from United Trust Bank, paying 2.05% on a minimum deposit of £500. If you can afford to tie your money up for longer, Vanquis Bank’s five-year fixed rate bond pays 2.50% annual interest on a minimum investment of £1,000.

Current accounts with interest

Remember that many current accounts also pay high rates of interest, so if you tend to stay in credit every month, it’s worth switching to one of these. For example, Nationwide Building Society’s FlexDirect account pays a generous 5% annual interest on balances for the first 12 months, as long as you pay £1,000 a month into the account. However, this rate falls for 1% after the first 12 months, so you may want to switch accounts again when this happens.

Alternatively, Tesco Bank’s current account pays 3% on balances up to £3,000, or TSB’s current pays 3% on balances up to £1,500. Tesco’s rate is guaranteed until April 2019, but to be eligible you must pay in at least £750 a month, and arrange for at least three direct debits to come out of your account each month. To qualify for TSB’s rate you must pay at least £500 into your account each month and register for internet banking and paperless statements.

How to get the best high interest savings account

Savings rates change all the time, but if you don’t have time to hunt down the best returns yourself, The Telegraph has partnered with Savings Champion to offer a Concierge Cash Service.

The Service constantly monitors accounts and ensures that clients with more than £100,000 always benefit from the highest possible returns. It will also make sure that your funds are spread between as many providers as necessary to ensure full protection from the Financial Services Compensation Scheme (FSCS). The FSCS covers deposits up to £85,000 per person, per financial institution, so that your savings will be protected in the event that a savings provider fails.

Make your money work harder with personalised, expert savings advice from Telegraph’s Concierge Cash Service.

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