5 ways to stop inflation eating your savings

With inflation dipping to its lowest rate in nearly three years, and the Bank of England base rate remaining higher (as it has for many months), could now be a good time to boost the power of your savings?

“The latest inflation figures are now closer to the Bank of England's 2% target than they've been for nearly three years - which means we could be inching closer to an interest rate fall,” says Alex Edmans, Product Director for Saga Money.

"However, before those cuts can happen, the Bank will want to see some clear indicators that inflation is truly under control, so there's likely to be a bit more of a wait. 

"This is currently good news for savers, as it means they could better protect from inflation nibbling away at their cash. 

“With accounts on the market still offering more than 5% returns, both fixed-rate and easy access, it means better growth for your money - in real terms - than we've seen for a while."

With billions of pounds sitting in accounts paying little-to-no interest at all, it could pay off to check how well your current savings are performing.

If you’ve got savings goals in mind – such as helping your adult children navigate the property ladder, preparing for care in the future or going on a dream holiday – you can make simple changes to more easily hit those targets.

1. Shop around – are you getting the best rate?

One of the simplest ways to boost your savings is to look for a more competitive rate. 

A price comparison website can help you see differences in features between accounts, and all you then need to do is make the switch.

“As a general rule of thumb: if you’ve had a savings account for more than a year you could likely get a better interest rate on the account,” says Laura Suter, Director of Personal Finance at AJ Bell. 

“While it may feel like a hassle to compare different accounts, the potential benefits far outweigh the effort involved.”

According to research from Unbiased, those over 50 have average savings of around £35,000. 

If they moved that amount from an account with 1% interest to one paying 5%, for example, it would earn an extra £1,400 a year - making those savings goals much easier to hit. 

2. Consider an easy-switch savings platform

If you don’t want the hassle of finding a better account every time your interest rate drops, a savings platform can do the hard work for you. 

These websites let you choose from multiple savings accounts from different providers at once, so you can spread your money to easily take advantage of the best rates available. 

“Savings platforms have become increasingly popular among savers in recent times to help people cope with rapidly-changing savings rates,” explains Alice Haine, Personal Finance Analyst at investment platform Bestinvest.

“Finding the best deals can take a bit of time, so using a provider that tracks the best savings accounts, then allows you to hold multiple savings accounts in one place, can be attractive.   

“Once you are onboarded, monitoring rates and switching money can take minutes, with no need to make a fresh application or remember a new set of login details.”

Just keep in mind that savings platforms work with a panel of partner banks which means they won’t offer access to all savings accounts available on the market. 

Haine also warns: “You might not always get offered the best rates possible as the platform may take a cut of the partner banks’ rates. This means a saver might get a better rate if they went to the provider directly.” 

It’s also important to check whether the platform has service charges to use it, and if there’s a minimum deposit limit to start saving.

If your savings platform uses a ‘hub’ approach, where your money is stored when it’s not in a savings account, check it’s held with a registered bank – using the Financial Services Register - and is covered by the Financial Services Compensation Scheme (FSCS), as this gives you protection in the event the firm fails.

3. Use ISAs to save on taxes

Higher savings rates mean you’ll earn more interest. But you may also pay more tax, as the amount you’re making could push you over your personal savings allowance (PSA).

“If you are a basic-rate (20%) taxpayer, you can earn up to £1,000 in savings interest per year without paying any tax, but this reduces to £500 if you are a higher-rate (40%) taxpayer, and you get no allowance when you are an additional rate (45%) taxpayer,” explains Brad Sheridan, Paraplanner at BRI Wealth Management.

The good news is that Individual Savings Accounts, or ISAs, enable you to shelter up to £20,000 a year from tax, so it pays to maximise these first. 

“There are many different types of ISAs, and if you are not already using your ISA allowance, this can be a simple and effective way to make your savings more tax efficient,” adds Sheridan.

For higher-rate taxpayers – generally earning more than £50,271 per year - interest on any savings over £10,000 in a 5% account would be subject to tax. However, if that money is placed in an ISA, there’ll be none to pay.

For taxpayers in Scotland, the rates are a little different, so check to make sure you’re aware of how much you can save before paying tax.

4. Fix when needed, easy access when not

Money held in an easy-access account can be withdrawn quickly to cover unexpected expenses. 

But easy-access interest rates are typically variable and can include a bonus that temporarily inflates the overall rate for a short period. 

It’s therefore worth stashing any cash you won’t need for a while – such as saving to help your children move into a better house or planning for grandchildren’s university fees - in a fixed-rate savings account (sometimes referred to as a ‘bond’). 

These accounts pay a fixed rate of interest for a period, with deals typically spanning one to five years (although it’s possible to fix your money for a shorter time too). 

These fixed rates can be higher than easy access options, but the catch is that to get that rate you’ll need to leave your money untouched for the term of the deal.

Kevin Mountford, Finance Expert at Raisin UK, highlights how some fixed-term accounts have seen seen increases in interest rates to over 5% in recent months: “These [rates] won't stick around for long, so act now if you can lock away a portion of your savings. 

“This will ensure better returns [if] interest rates decrease in the next 12 months.” 

You may find instant access accounts paying impressive interest rates right now (with little difference between fixed rates in some cases).

However, with a fixed-rate option you at least get the peace of mind that your returns will remain the same if interest rates fall, and only drop when the deal runs out. 

5. Consider investments

If you have cash to spare and understand the risks, you could allocate a portion of your savings to the stock market, and investing in retirement can be a great way to help beat inflation and rising costs.

Investing has the potential for higher returns than savings accounts. But experts recommend you’ll need to be happy to tie up your funds for at least five years, if not longer. This should help smooth out any fluctuations in the stock market – so make sure this aligns with your longer-term retirement plans.

Suter says: “Studies of stock market returns over the long term show that they average around 5%, after inflation, so around 7% at usual rates of inflation. Assuming this growth and deducting 1% for charges, a £10,000 investment would grow to £17,908 after 10 years. 

“In that same period, a cash account paying 2% would see the same £10,000 initial investment turned into just £12,190 – almost £6,000 less. After 20 years the difference between the two pots would be more than £17,000.”

However, investments can also fall in value, so there’s a chance you could get back less than you’ve put in. Also think about how much risk you’re prepared to take - bear in mind it’s usually safer to invest in funds that buy investments on your behalf, than it is to buy shares in individual companies.

That’s because you’re investing in a more diverse range of shares. This can mean a lower chance of sharp swings in price, as it's less likely that all the shares in the fund will lose value at the same time.

“Getting into investing for the first time can seem daunting, the jargon the industry tends to use is pretty off-putting for newcomers, but there are loads of great new services, websites and books popping up that will help to explain terms and guide you through,” explains Suter. 

“Regular investing is an ideal route for first-timers because they can invest a small amount each month into the market and get used to investing. 

“Many investment platforms will allow you to start from as little as £25 a month, which you can then build up as you get more confidence and spare cash.”

- Investing in retirement: how to get started

Remember, it’s not just cash you can shelter from tax using an ISA – you can also protect your investments by using a stocks and shares ISA, which should be available from most investment platforms.  

This also has the advantage of protecting you from Dividends Tax and Capital Gains Tax, which more investors are now having to pay thanks to the successive reductions in their allowances.