Every little helps in war against inflation

Price rises are chipping away even further at people's savings but there are still ways of earning more interest
  • @ukmoneyguru

Inflation is on the up again and is predicted by the Bank of England to carry on rising through most of 2013. This is yet another blow to savers who have faced years of low returns. Inflation can eat away at savings in a fairly shocking manner; if you had invested £10,000 five years ago, allowing for average interest and tax at 20 per cent, it would be worth just £8,899 in terms of spending power today.

"Now is the time for people to stop watching their savings get eaten alive by inflation and greedy banks and move at least some of their money to where it will actually grow in value, even after inflation," says Giles Andrews of the peer-to-peer lending site Zopa.com. For basic-rate taxpayers keeping pace with current inflation means earning at least 3.37 per cent, or 4.50 per cent for higher-rate taxpayers.

At present, there are just three inflation-beating fixed bonds and 37 ISAs (individual savings accounts) for basic-rate taxpayers including the Triodos Five-Year Ethical Savings Bond paying 3.75 per cent and the Coventry Building Society 60-Day Notice ISA paying 3.25 per cent, while higher-rate taxpayers are stuck with the grand total of zero non-ISA inflation-beating accounts, according to Moneyfacts.co.uk.

Although there are no standard easy-access accounts or notice accounts on the market that beat inflation, the difference between the average rates on offer and the best buys can be significant. So, even if you don't want to lock your money away in a bond or you have already used up your ISA allowance, you can still limit the impact.

"Even if savers are able to just beat the market average any extra return they could get for the money is better than sitting in a low-rate account," says Charlotte Nelson of Moneyfacts.co.uk. "For example the average one-year fixed rate pays 2.26 per cent today. However, if you invest in the highest-paying one-year fixed rate bond you would achieve a rate of 3 per cent, which would be £74 extra in interest if £10,000 was invested."

You are likely to find better deals away from the traditional high street banks, says comparison site MoneySupermarket, which points to Tesco Bank's Internet Saver account, which offers a rate of 2.40 per cent (including a bonus rate of 1.15 per cent over 12 months), compared with the best deal on the high street, Halifax's online saver paying just 2.05 per cent, albeit without a bonus.

This is a good opportunity to investigate other products. Offset mortgages can combat paltry savings rates, particularly for higher-rate taxpayers. Here, the bank links your savings to the outstanding mortgage balance, so, on a £100,000 mortgage with £10,000 in savings, you would only pay interest on £90,000. Instead of earning interest and paying tax on your savings, you use that money to pay less interest on your mortgage (which is at a higher rate than you could find in the savings market) and can effectively overpay each month to clear your mortgage early.