The rising costs of food, petrol and heating have pushed inflation up past 4% over the last few weeks, and for some of us — most notably the elderly — the cost of living has been rising at a much faster rate.
Although the pressures of rising inflation are being felt firstly in consumers' wallets, another unfortunate side-effect of rising prices is that your savings also need to work much harder to keep pace with the true cost of living.
Taking the Government's latest figure of 4.3% for inflation (as measured by the Retail Prices Index), basic-rate taxpayers now need to earn at least 5.38% on their savings to beat both tax and inflation. If you're a higher-rate taxpayer, the situation's worse — with nothing less than 7.17% likely to be good enough to provide you with a real return after tax.
The good news is that while the Bank of England base rate is still at just 5%, the credit crunch has pushed savings rates up — as banks fight to get their hands on your money. Last time inflation rose above the current levels — in December 2006 — the base rate was also at 5%, but it was impossible to get savings accounts that paid much above that.
Today, it's possible to pick up one-year fixed-rate savings bonds paying more than 7%, while there are regular savings accounts paying in excess of 10%. Below, we take a look at the best accounts in each market.
Unless you're planning to use your full £7,200 ISA allowance for investing in stocks and shares, it's worth starting off any savings pot you have in a cash ISA, which is protected from tax. All UK taxpayers are allowed to put up to £3,600 a year into a cash ISA, and the best accounts currently on offer will pay you a rate of over 6%.
For the best ISA rates, you'll need to agree to tie your money up for a year. For example, Julian Hodge Bank will pay you 6.5% in its one-year fixed-rate ISA, while Halifax will pay you 6.3% on a similar account.
The important thing to remember with cash ISAs is that even with rates as low as 5%, you're still beating inflation as there's no tax to pay.
Once you've used up your ISA allowance, the next step is to find an account that pays as high a rate as possible, but which still gives you penalty-free access to your money.
Beware that many so-called “instant access” savings accounts will dock you interest during a month when you make a withdrawal, so be sure to read the small print. HSBC's online bonus saver, for example, pays 5.25%, but only the equivalent of 2.5% in any month where you make a withdrawal. According to research by Sainsbury's Finance, 12 of the top 50 savings accounts have restrictions on withdrawals.
It's also important to watch out for introductory savings rates — where banks pay a high rate for the first few months, only to revert to a much lower rate later. For example, Abbey currently offers one of the top five instant access accounts on the market, paying an impressive 6.5%. However, savers only receive this rate for the first 12 months, after which the account will only pay 5.5%. Furthermore, there is no guarantee about where the account's rate will go from there. This is still good value if you know that you'll have the discipline to shop around in a year.
Birmingham Midshires and Kaupting Edge currently offer the best instant access savings rates with no ties, paying 6.52 and 6.5% respectively.
For higher-rate taxpayers, there isn't an instant access account on the market that pays enough interest to help you beat both tax and inflation. However, some regular savings accounts and fixed-rate bonds do pay more than the 7.17% that you'll need to make a real return after tax.
If you're looking to put away between £10 and £500 each month, you can earn rates of up to 12% interest. However, you'll also need to be prepared to move your current account to get these kind of deals.
Alliance & Leicester pays 12% on its Premier Regular Saver, on amounts of up to £250 a month. But only for the first year, and only if you switch to it from another bank.
Alternatively, Halifax will pay you 10% on its regular saver account — even if you don't have your current account with them — on deposits of up to £500 a month, but again only for one year. You can't make any withdrawals from either of these accounts during the first year.
These accounts can prove good value, but they tend to be subject to more stringent conditions and limits than most, so think carefully about whether they really make sense for you.
The best rates are always reserved for those who are willing to tie their money up for at least a year, without making any withdrawals. At the moment, Abbey will pay you 9.1% if you're willing to tie your money up for a year, but only if you invest the same amount in one of their investment products, as you put in the savings bond.
Birmingham Midshires' Internet one-year fixed-rate bond will pay you the magic 7.17% which higher-rate taxpayers need to beat tax and inflation, while Bank of Cyprus has a couple of one-year bonds paying 7.15%. The best two-year bonds pay around 7.12%, such as West Bromwich Building Society's E-Bond 14, while FirstSave offers a three-year bond for 7.1%.
Again, it's important to read the small print when it comes to fixed-rate savings bonds. Some will allow you to get your hands on your money before the policy matures and others won't. Of the ones that do let you cash in your policy early, some will take away all the interest you've earned, while others will take only some of it.
Where to find the best rates
Websites such as moneyfacts. co.uk, defaqto.com and moneysupermarket.com are among the best for hunting down the best savings rates.
Each of these break down accounts into relevant different categories, and provide information on relevant restrictions and limits. Alternatively, to find an independent financial adviser in your local area, visit www.unbiased.co.uk.