Yahoo Finance 
You can still earn 6% on your savings, but not with a savings account
The UK’s annual rate of inflation, as measured by the Consumer Prices Index (CPI), rose to 2.7% in May.
Not only does that number mean the cost of living is continuing to rise for many of us, particularly those of us who drive or fly, it also means NO ordinary savings accounts or cash ISAs now beat inflation.
That’s despite the fact that there are a staggering 820 savings accounts available at the moment.
A year ago, when CPI inflation was 2.8%, there were 87 savings accounts and 123 cash ISAs that beat inflation.
Sadly, that news probably won’t come as a surprise to many of us. Savings rates have been plummeting for some time, in part due to the Government’s Funding For Lending scheme. This has offered cheap loans to banks and building societies, meaning they don’t need savers’ money to boost their balance sheets.
Financial research website Moneyfacts says that a basic-rate taxpayer now needs to find an account paying 3.38% to beat inflation, while a higher-rate saver is looking for an account offering 4.5%.
So where can savers turn now for inflation-beating returns? There are still some options, but most come with some element of risk.
Peer-to-peer lending
You could earn decent returns by lending your money to other people or to small businesses. Peer-to-peer websites such as Zopa, RateSetter (both of which lend to individuals) and Funding Circle (which lends to small businesses) promise inflation-beating returns, for basic-rate taxpayers at least.
Product | Gross interest rate (AER) | Interest rate after tax (basic-rate taxpayer) | Interest rate after tax (higher-rate taxpayer) |
5.80% | 4.64% | 3.48% | |
5.20% | 4.16% | 3.12% | |
4.30% | 3.44% | 2.58% |
Those RateSetter rates are inclusive of fees and bad debts. However, neither company is covered by the Financial Services Compensation Scheme (FSCS), which covers £85,000-worth of savings in any one institution should it go belly up.
However, RateSetter does have a Provision Fund which it runs to protect savers’ money.
[Compare rates from peer-to-peer websites]
Current accounts
If you have £2,500 or less to save, then it’s actually worth looking at one current account at the moment. And that’s Nationwide’s FlexDirect account. This is paying 5% AER on balances of up to £2,500 for the first yea, providing you pay in at least £1,000 a month to the account.
But you don’t need to switch to Nationwide as your main account. You could just transfer in the £1,000 from elsewhere and then transfer it out again.
Credit unions
We’ve heard of some credit unions paying above-inflation rates on Cash ISAs, so it’s worth taking a look at the Find Your Credit Union website to see what’s on offer in your local area or your industry. Credit unions are covered by the FSCS up to the £85,000 limit.
Stocks and shares ISAs
We’re getting into more risky waters now. If you want to take the plunge into the stock market, you can invest up to £11,520 in a stocks and shares ISA in this tax year.
With the stock market rising at the moment, that might look like an attractive option. But be aware that what goes up can also come down – fast. You should really only be considering stocks and shares ISAs if you’re in for the longer haul. That way you can hopefully smooth out any losses over time.
Index trackers are by far the cheapest way to invest in the stock market, with low fees as there are no fund managers involved. They simply track the performance of a particular index, for example the FTSE All Share.
[Take a look at some stocks and shares ISAs]
Weigh up risk and reward
When you’re looking at places to put your money away, it’s always important to consider your attitude to risk. More importantly, could you afford to lose your money if the worst happened? These are questions you need to ask before you make your final decision.
[See if you can earn more on your money – compare different savings products in our comparison centre]
