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With inflation starting to ease and interest rates likely to fall in coming months, it remains important to seek out savings accounts paying inflation-beating returns.
There are currently 1,224 savings accounts and ISAs that now pay returns higher than the 3.6% inflation rate, and therefore protect the value of your savings from being eroded by rising living costs. It’s a far cry from the couple of years prior to November 2023, when no savings accounts beat or even matched inflation. This includes easy access accounts and fixed bonds, as well as easy access cash ISAs and fixed rate ISAs.
Caitlyn Eastell, spokesperson at Moneyfactscompare, said: “It has been three years since inflation reached its 11.1% peak, and unsurprisingly, there was then not a single savings account that could outpace this. The rising cost of living is a persistent struggle and what would’ve cost £1,000 in 2022 has now risen by over £100, so it’s no surprise that some savers may feel like they’re falling behind despite inflation being lower.
“Today, just over one in two accounts offer over 3.6%, but with interest rates trending downward, this number is likely to drop. Even though lower inflation may be seen to offer some respite for consumers, it’s still important for savers to check their accounts and, if they are getting a raw deal, to switch to a more competitive rate.”
Here, we explain why grabbing a competitive Individual Savings Account (ISA) ahead of the Budget might be a sensible move, and where you can find the best rates.
Why is now a good time to get an ISA?
Lower inflation means interest rates usually follow the same trajectory. The Bank of England last cut the base rate in August to 4% and it seems likely that the next move may also be a downwards one.
This means that now could be an ideal time to take advantage of a good inflation-beating ISA offering a fixed rate for at least a year, before they potentially disappear in coming months.
Having a savings account with an interest rate higher than inflation is really important if you want to maintain the purchasing power of your cash.
For example, if you have £10,000 in an account earning 0.25%, with inflation at 3.6%, after one year your total balance would be £10,025. However, once you adjust for inflation, the real spending power of that money would fall to around £9,674.
If you picked an ISA paying 4.50% tax-free, not only would the total balance have increased to £10,450 after a year, but more importantly, the real value would have grown too, giving you spending power of £10,178, so more than keeping up with inflation.
Another good reason to make the most of your £20,000 cash ISA allowance now is that the government is currently planning ISA reforms, with widespread speculation that the Chancellor could reduce the cash ISA limit to as little as £4,000 in this year’s Budget.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “More people than ever will be considering a cash ISA this tax year, given the rumours suggesting changes could be on the way in the Budget. If you’re in the same boat, it’s worth taking the time to consider why you feel a cash ISA is right for you.
“If you need to keep the money in cash for emergencies or short-term spending needs, then a cash ISA is a great home for it. This can be the case whether you’re running the risk of racking up a tax bill, or you just want to save yourself from ever having to worry about it.
“However, if you don’t need this money for 5-10 years or longer, and you’re opting for cash purely because of the rumours, or because you don’t have the confidence to get started with investing, it’s worth investigating your options. You could put some in a cash ISA and some into a stocks and shares ISA, so you start small and learn from your experience over the coming months. Then, when you’ve built more confidence, you can transfer a bigger chunk of the money, and benefit from the enormous potential offered by investment.”
Find out more about the different types of ISA and how they work in our guide Everything you need to know about ISAs.
What are the best ISAs right now?
There are a few different kinds of ISAs you can choose from if you want to take advantage of current high rates, but thinking long-term, your best bet may be a fixed-rate cash ISA.
This is an account where the attached interest rate is guaranteed for a certain term – usually one year, two years, three or five – meaning that even if interest rates drop again this year, you’ll still receive inflation-beating returns for the duration of the account.
Top 5 5-Year Fixed Rate ISAs
Other types of cash ISA, such as notice cash ISAs, may also offer competitive rates, but these are usually variable rate accounts and so returns may drop if interest rates continue to fall.
Top 5 Notice ISAs
Currently, the highest rates are attached to cash ISAs with one-year terms. While it is common for higher rates to be reserved for ISAs with longer terms, the opposite is true at the moment, as interest rates are widely expected to fall in the future.
Top 5 1-Year Fixed Rate ISAs
Find out more in our article Which cash ISAs pay the most interest?
Remember that with a fixed-rate account, you won’t usually be able to access your savings during the fixed-rate term. Certain accounts do allow you to make withdrawals, but this will often result in an interest penalty, so it’s best avoided if you can help it. If you would like to be able to make withdrawals at a moment’s notice without penalty, consider an easy-access cash ISA instead.
Top 5 Easy Access ISAs
Learn more about ISAs
If you’re not familiar with how ISAs work, it’s never too late to get to grips with how they work.
Simply put, an ISA is essentially a tax-efficient “wrapper” for your savings and investments. Any returns you generate from an ISA aren’t subject to income tax or capital gains tax (CGT), so even if you have savings accounts already, an ISA can be a really useful addition if you have used up your Personal Savings Allowance for the current tax year.
Read more about ISAs in our article Everything you need to know about ISAs and about how to make the most of your savings allowances in our article Are you paying unnecessary tax on your savings?
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