Savers left stranded by sudden jump in inflation

Savers left exposed as inflation soars three times higher than top-paying account
Savers left exposed as inflation soars three times higher than top-paying account

Savers face losing thousands to rising inflation, despite vast improvements in the best-paying accounts.

The rate of inflation leapt unexpectedly to 10.4pc in February, up from 10.1pc. Economists had predicted the rate to fall this month.

The latest inflation spike is likely to cast doubt over the Office for Budget Responsibility’s prediction that inflation will reach 2.9pc at the end of the year.

No savings account carries a rate that comes close to the double-digit figure, leaving savers exposed to the corrosive impact of rising prices.

The average rate on an easy-access savings account is just 1.85pc, according to the financial data analyst Moneyfacts.

This means a saver with £10,000 in the average easy access account would gain just £185 in interest over 12 months, but lose £774 to inflation in real terms.

Even the top easy-access savings account on the market right now cannot protect savers. With inflation soaring, savers who bag the market-leading rate of 3.35pc would still see £639 of their savings eaten away after a year.

Those with large sums held in savings accounts face a double whammy of tax and inflation. A higher rate taxpayer with £50,000 in the top easy-access account would earn enough interest to exceed their annual £500 personal savings allowance, resulting in a tax hit of £480, on top of the £3,193 they would lose to inflation.

Savers who have not already done so should remember to use up their £20,000 tax-free allowance by the end of the tax year on April 5. Any interest earned inside a tax-free Individual Savings Account (Isa) is free from tax. The best cash Isa rate on the market right now is 3.2pc, according to Moneyfacts’ data.

Alice Haine of the investment platform Bestinvest said lingering inflation was eroding the value of savings pots and turning real returns negative. “Savings rates have edged up dramatically in recent years, but inflation needs to dip significantly before savers really start to gain in real terms – something that may happen towards the end of this year," she said. 

She added anyone who has savings languishing in ultra-low-interest accounts should not hesitate to move their money elsewhere. “Ultimately, making your money work harder in a higher-interest account is a better option, even with high inflation eating away at returns, than leaving it in an account that pays little or no interest at all.”

Savers will get higher rates if they are willing to part with their money for longer. Al Rayan Bank is currently offering 4.55pc for a two-year fixed rate bond.

Kevin Brown of savings firm Scottish Friendly said: “The biggest increases in the headline rate of inflation have come from restaurants and hotels, as well as food and non-alcoholic beverages, which rose by a staggering 16.8pc over the past 12 months.”