Current and savings accounts that beat inflation

Current and savings accounts that beat inflation

Inflation jumped to a five-year high of 3% in September, official figures revealed.

While the increase is good news in terms of an increase next year to the State Pension, it poses a more immediate threat to our savings, which must now work even harder to keep pace with the rising cost of living.

But with savings rates still miserly, that's no easy task!

To protect your pot, you'll need to find an account paying at least 3%, provided 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.

Inflation-beating rates are possible... for some

The good news it is still possible to beat inflation with your cash savings. The bad news is you'll have jump through a few hoops to do so.

What's more, these accounts are really only suitable for smaller sums of money as the headline rates tend to drop off a cliff after a certain threshold is passed.

If you have a really large pot, we've offered a few alternatives further on in this article, but in short you'll probably need to make do with one of the best fixed-rate deals and lose money in real terms (for the time being, at least) or take on some risk and invest in the stock market in search of a healthier return.

Savings accounts (with strings attached)

Various regular savings accounts can still smash the current rate of inflation, with top accounts paying a whopping 5%.

The catch? There are a few, actually.

First off, the rate is only available for one year, after which point the amount you earn will fall dramatically.

Second, they're really designed to attract new savers as you can't put in a lump sum, although existing savers can at least funnel up to £300 a month into them before the rate falls after one year.

Finally, the top-paying accounts – from Nationwide, First Direct, Santander and M&S – are only available to current account holders of each specific bank.

Not for you? Compare the best deals in our savings comparison centre.

Current accounts (with strings attached)

Some current accounts still offer inflation-beating rates and allow a little more flexibility than regular savings accounts.

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.

Compare interest-paying current accounts

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's offering returns of up to 5.5%.

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

Compare potential peer-to-per lending returns against traditional savings accounts

21 PHOTOS
Vintage money-saving tips
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Vintage money-saving tips
Back then there was no choice, because the mass-produced microwaveable meal was just a glint in a marketing guru's eye, but now, cooking from scratch can save substantial sums.
The older generation learned that there were meat-free days of the week to save money, and that if you had meat you''d stretch mince with breadcrumbs, or buy cheaper joints and use every scrap.
Perfect fruit and vegetables and top-of-the-range brands are a new phenomenon. Buy generic non-branded food and fruit and vegetables in whatever size and shape is most affordable

Nowadays we rush around the supermarket grabbing things we like the look of - with little idea of what we're going to do with it. Making a list and thinking about what you buy can save you thousands of pounds over the course of a year.

There's no such thing as 'left-overs' there's just the ingredients for tomorrow's dinner. The remains of the meat can be stir-fried the next day, the vegetables blended into  soup, and the potatoes saved for bubble and squeak.

Try an experiment and eliminate everything from your life with the word disposable in the title. Not only will you save money, but your bin will take far longer to fill too.

Before you bin anything, think twice about whether you can give it a second life. Think carefully, does your granny have her tried and tested tips that she has a habit of mentioning, for instance, washing out freezer bags? If you mock, you're missing a trick and wasting money and resources.
Cutting out draughts and insulating your home properly can cut 10% off your heating bill.
Back in the 1940s when no-one had central heating, people got used to wearing another layer at home. Try lowering your thermostat gradually, and only stop when those around you start to notice - you'll be surprised how much you can save.
If you save your washing and dish washing until you have a full load every time you'll save energy and save money.
Over the generations we have been sucked into believing the hype. In the days when adverts were few-and-far between, we managed without many of the things we consider essential nowadays. Re-consider what you buy, and why. Without advertising, would you buy any of it?
It's always cheaper to save in advance and plan a purchase than to rush in and borrow - which could end up costing you hundreds of pounds more in interest.
Older generations typically withdraw what they can afford to spend in cash and then leave their debit card at home or deep in their wallets. This has the advantage that they don't tend to reach for a debit or credit card and spend more than they can afford.
Because the older generations couldn't borrow their way out of trouble, they tended to plan more. Give your family a financial safety and a nest egg for the future.
Back when there were only a finite number of items of clothing to go around in a neighbourhood, people borrowed from each other for special occasions. Nowadays swapping and sharing can save substantial sums
Back in the 1940s when no-one had central heating, people got used to wearing another layer at home. Try lowering your thermostat gradually, and only stop when those around you start to notice - you'll be surprised how much you can save.
There was a time not so long ago when no-one could actually remember anyone who had actually bought a bike. They were passed through the siblings, then across family and friends networks, so that decades later, children were still learning to ride a bike for free. Of course it helps if you buy something gender-neutral, then you can hand it down, and reap the benefits as others hand expensive toys on to you.
In previous generations, neighbours would think nothing of asking each other to babysit, walk their dog, or to borrow a ladder. Nowadays we pay handsomely for babysitters and dog walkers, and each have an expensive ladder gathering dust in the shed.
The army of people who come to our homes to do odd jobs is a new phenomenon for all but the very wealthy. You may well have the skills required to complete these jobs, so get stuck in.

Ditch going out for dinner or browsing round the shops for taking a walk, visiting the beach with a picnic, or holding a family DVD night.

Nowadays we're constantly striving for a bigger TV, a flashier car and a better kitchen. Generations ago people never considered that they would ever be able to afford bigger, flashier and better, so they got on with the business of enjoying what they had.
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