Savings Ratewatch: can you beat inflation and the taxman?

Inflation may have fallen marginally to 3.4% – according to the consumer price (CPI) index – but savers are still finding it almost impossible to find a savings account which shows a real return after tax. And if VAT is increased in next week’s Budget, as expected, that will inevitably mean that inflation remains high as it will push up prices across the board.

To stop savings being eroded by inflation, a basic rate tax payer needs to find an account paying a minimum of 4.25%, while a higher rate tax payer needs to earn 5.67% – impossible if you want a low risk deposit account even if you are prepared to tie up your funds in a fixed rate, fixed term account.

‘Basic rate tax payers have access to 27 accounts, but most still require an existing longer-term, riskier investment product at the same time,’ points out Darren Cook of moneyfacts.co.uk. ‘Savers hardest hit by the rise in inflation are those who rely on their savings to supplement their income, many of whom are pensioners.’

Fixed rate bonds

Probably the best strategy is to go for a short-term fixed rate bond and hope that Bank Base Rate goes up sooner rather than later.  Santander has just launched a one year bond paying 3.01% for sums of £10,000 and upwards. Even better, it has a monthly income option. The new bond is, however, only available for ‘new money’ – not for sums already in a Santander account. For sums under £10,000 the rate is 2.6%. 

It is a limited offer due to be withdrawn on 30 June and may be withdrawn earlier - without notice - if available funds are used up before then. Customers can apply either by visiting any local branch – which can be a frustrating business requiring an appointment – or by contacting Santander by telephone on 0800 234 6065.

For one year investments current best buy is from Aldermore Bank which is paying 3.05% with a minimum investment of £1 or more and you can open an account online at or by post or telephone.     There is a raft of deposit takers paying 3% fixed for one year investments including Northern Rock (postal only – details at ) Barnsley Building Society () and the Post Office ()  on sums of £100 to £500 respectively and both the Post Office and Barnsley offer an online facility. ICICI Bank is paying 3% too on sums of £1,000 or more. 

Meanwhile Nationwide has increased the rates on it two and three year fixed rate Ebonds paying 3.5% on two year investments and 4% for three years. Minimum investment is £1. But those with a minimum of £500 or more can get a better rate of 3.7% for two year investments at the Post Office, while ICICI Bank is also offering 3.7% fixed for two years with a minimum investment of £1,000.

For three-year fixes best buy is from ICICI Bank which is paying 4.15% on sums of £1,000 and you can open an account online. The AA, the Post Office and Lloyds TSB are all paying 4.1% with minimum investments ranging from just £1 at the AA where you can open an account online to £2,000 at Lloyds TSB which also allows online applications as does the Post Office. For those prepared to make a five year commitment best buy is still ICICI Bank’s Hisave Account, the only one now paying 5% on sums of £1,000 or more.

Instant access accounts