What to do if you savings accounts don't keep up with inflation - Jenny Ross

Are there still accounts out there which allow for one or two withdrawals per annum or withdrawal with a reasonable interest penalty. What are the options and which do you consider the best?

Jenny says...

With inflation at a 30-year high, savers have to accept a very deflating fact: that their money is losing value in real terms. That’s because no account on the market can come close to matching inflation – even if you tied your money up in a five-year fixed-term account, which tends to pay the highest rates, you wouldn’t earn much more than 2 per cent.

So first of all, it’s worth asking yourself if you really need to keep all of your savings in cash. You say that you’re reluctant to invest because you don’t want to take any risks with your money in retirement, which is completely understandable. But the erosive effects of inflation means that holding too much in cash is also a risky approach. It even has a name: ‘reckless conservatism’.

While investments rise and fall in value over the short term, they stand a much better chance than cash of beating inflation over the long term. Over the past year, the average stocks and shares Isa fund returned 6.92 per cent – more than 13 times the average cash Isa rate (0.51 per cent), according to financial data provider Moneyfacts.

But whether or not you decide to invest, you’ll still need to keep any money you think you’ll need access to in the next five or so years in cash. So what’s the best home for it? The longer you can tie up your money, the more interest you’ll earn.

The market-leading instant-access accounts today are paying around 0.7 per cent, compared with around 2 per cent for a three-year fixed account. Over three years that’s a difference of £400 on a lump sum of £10,000.

But you’re right to point out the potential drawback of locking your money away – you could miss out on better deals elsewhere if rates pick up in the meantime. And that’s exactly what’s been happening recently, as providers start to pass on increases in the Bank of England base rate.

Notice accounts are a halfway house between accounts that allow you to withdraw your money whenever you want and those that require you to lock it away for several years. The best notice account on the market as I write this is Shawbrook Bank’s 120 Day Notice account, which pays 1.15 per cent.

If you were to deposit £10,000, you’d get an extra £45 over a year compared with the best instant-access account. As the name suggests, you’ll need to plan your withdrawals in advance.

If you’re happy to limit your withdrawals but don’t want to have to give notice first, you’ve got a choice of accounts that restrict you to two or three withdrawals a year. The top rate is offered by Paragon Bank, which pays 0.8 per cent on its Triple Access Cash Isa, as well as its non-Isa equivalent.

Another potential home for your savings that gives you the flexibility to withdraw cash whenever you want penalty-free – as well as the possibility of impressive returns – is NS&I’s premium bonds. There are no guarantees, though. Instead of earning interest you have the chance of winning between £25 and £1m in monthly prize draws.

Of course, you could win nothing, which means your savings will still be at the mercy of inflation. But the possibility of winning big has kept savers flocking to them, and the paltry rates offered by traditional savings accounts has only made them look like a better bet.