Savings: Where to put cash if you want it to grow

Savers stuck in miserly deposit accounts have been urged to take matters into their own hands after the latest inflation hike left just a handful of savings options offering returns above inflation.

It was revealed this week that inflation reached 3.7 per cent in December, as measured by the consumer prices index, with the retail prices index measure hitting 4.8 per cent.

The biggest price increases in December were on transport expenses, food and household bills. The latter was on the back of energy bill hikes from five of the big six suppliers, although one only came into force this month and another does not take effect until 4 February. Nor did the December figure - up from 3.3 per cent in November - factor in this month's increase in VAT from 17.5 to 20 per cent, or the rise in fuel duty

While it could be several months before the VAT impact becomes clear, most economists believe that even with inflation tipped to hit 4 per cent over the coming months, the Bank of England will keep interest rates where they are.

But that isn't necessarily the bad news for savers that it immediately appears. Savings rates are, to a growing degree, divorced from interest rates, with providers already offering record margins above base rate. There's a strong chance that even if interest rates rise, savings rates will remain unchanged or could even fall back, as providers take the chance to narrow their margins.

For now, however, inflation of 3.7 per cent means a basic rate taxpayer needs to earn 4.63 per cent gross on their savings to maintain their spending power. A higher rate taxpayer needs a savings rate of 6.17 per cent (gross).

No taxable conventional savings account comes close to beating the effects of both inflation and taxation, with individual savings accounts (Isas) the best hope, due to their tax-free status. The closest is a five-year fixed rate bond from Coventry Building Society, at 4.73 per cent, but the money remains out of reach for the duration.

No non-Isa account helps higher-rate taxpayers beat inflation.

Most savers still have their money in the least competitive account, according to Moneysupermarket.com, but if you're pro-active about tracking down the best rates, it's still possible to secure a real return.

Kevin Mountford, head of banking at moneysupermarket.com, said: "In the current low rate environment, many may think it is easier to stick with their existing savings provider. However, it is more important than ever to consider switching to the best paying account in order to make their money work harder.

"There is a great deal of headroom between the average rates and leading rates."

Here are some of the options:

Savings accounts

If you don't want to stray from cash savings, the best way to beat inflation is to take advantage of your annual Isa allowance (10,100, half of which can be used for a cash Isa).

The top inflation-beating savings option is from Principality Building Society (see table). Its Extra Cash Isa Issue 2 is a one-year bond requiring a minimum investment of 500 and paying interest of 4.5 per cent.

But of the 19 inflation-beating Isas on the market, all but one requires savers to lock their money away for at least three years.

No easy access account comes close to beating inflation. Louise Holmes, of Moneyfacts, said that while some providers have improved their easy access rates in recent weeks, they remain too low to combat the effects of inflation.

"Typically, cash Isas and longer-term fixed-rate bonds tend to offer the best rates for savers trying to beat inflation. However, with interest rates predicted to rise by the end of the year, many investors are reluctant to lock funds away for a long period."

Some providers offer impressive rates to savers who are also existing current account customers. A prime example is the 10 per cent (gross) regular saver account from HSBC, for which only Premier Plus, Passport or Graduate Plus customers qualify.

Barclays, Principality and Scottish Building Society also offer attractive rates to current account customers. But with restrictions around the accounts and many reverting to a lower rate after the first year, savers need to think very carefully before switching current account just to secure a higher savings rate.

Equities

Higher rate taxpayers in particular should consider riskier investments that offer a greater hedge against inflation.

The paucity of savings income on offer over the past two years has helped drive a sustained increase in money going into equity funds, particularly those in Isa wrappers. Equity income unit trusts and investment trusts are popular among savers looking to replace income no longer offered by traditional savings accounts.

These provide a combination of capital growth and regular income and the unit trust sector boasts hugely successful funds including Neil Woodford's Invesco Perpetual Income funds, the Artemis Income and the Rathbone Income.

On the investment trust side, the Edinburgh Investment Trust, Aberdeen's Murray International and F&C's British Assets Trust are among the best-known UK and global income and growth options.

Adrian Lowcock of Bestinvest pointed out that investing in commodities can also help combat rising prices, albeit without necessarily providing a regular income. "Much of the inflation in the UK is imported, through higher prices in oil costs or foodstuffs, so portfolios that invest in commodities - such as gold, metals and grains - can provide an element of hedging against inflation," he said.