Inflation at 2.6%: where to put savings for better returns

Inflation as measured by the Consumer Prices Index (CPI) surprisingly remained steady at 2.6% in July, according to the latest figures from the Office for National Statistics (ONS).

Analysts and experts had predicted a slight uptick to 2.7%, but the ONS said the rising cost of food, clothing and household goods had been offset by falling fuel prices.

While the fact it hasn't increased is welcome, inflation is still high compared to a year ago, as the graph below shows.

That means your savings must work hard to keep pace with the rising cost of living. But with savings rates still miserly, that's a hard job to do!

To protect your pot, you'll need to find an account paying at least 2.6%, so long as the interest you earn is within your Personal Savings Allowance for the 2017/18 tax year.

The Personal Savings Allowance (PSA) allows you to earn £1,000 tax-free interest a year if you're a basic rate (20%) taxpayer or £500 tax-free interest a year if you're a higher rate (40%) taxpayer. There's no PSA for additional rate (45%) taxpayers.

To help you find the best home for your savings, we've rounded up the best inflation-beating accounts paying 2.6% or more.

Savings accounts

The good news: for the first time in months, there actually is a traditional savings account that can match inflation!

The bad news: you'll have to lock your money away for a whopping seven years to get the 2.6% rate.

The PCF Bank Limited 7-Year Term Deposit Issue 1 is admittedly a pretty extreme option, and we'll hopefully see more products that can match or beat the cost of living being brought to market in the near future.

If you believe the experts that savings rates are on the rise, you might be better off choosing a shorter term account that pays a lower rate but will allow you to shift your money penalty-free if better accounts come along.

You can compare the best deals in our savings comparison centre.

Why current accounts are better

Current accounts still offer better rates than traditional savings deals.

The Nationwide FlexDirect account offers a top rate of 5% on balances of up to £2,500. However, this will drop to a measly 1% after the first year, so you will need to move your money again. You'll also need to deposit at least £1,000 a month to benefit from the top rate.

The Tesco Bank Current Account guarantees to pay 3% on balances up to £3,000 until 1 April 2019, but you'll need to pay in at least £750 a month and set up at least three Direct Debits to earn that rate.

Alternatively, there's the TSB Classic Plus account, which pays 3% on balances of up to £1,500. Unlike the Nationwide deal, the rate doesn't drop after a year, and you just need to deposit £500 a month and opt for paperless statements to qualify for interest each month.

Other options to consider

If you are saving for a house or your retirement and are under 40 years old, then you could benefit from the new Lifetime ISAs.

These allow you to save up to £4,000 of your annual ISA allowance in cash or stocks and shares and on top of the return these offer the Government promises to boost what you save by 25% each year.

Skipton Building Society is the only provider to offer a Cash LISA at present. It pays a measly 0.5%, but that Government – or taxpayer-funded – bonus means you'll get a markedly better rate overall.

With inflation forecast to rise, it might be worth considering moving some of your cash into other places that have more risk but could offer greater rewards.

One option is peer-to-peer lending, where you lend your money to individual borrowers, businesses or investors.

This area currently isn't protected by the Financial Services Compensation Scheme but could offer far higher returns than a high-street account, plus since April 2016, you can hold some peer-to-peer investments in an Innovative Finance ISA (IFISA) which means you can save up to £20,000 tax-free.

Lending Works was the first major platform to launch an IFISA and it it's offering returns of up to 5%.

Meanwhile, Zopa has launched its IFISA paying up to 6.1%.