Inflation is on the rise again as new officials figures reveal an unexpected jump from 2.6% to 2.9% in August.
Analysts had predicted an increase to 2.8%, but sharp rises in food and clothing prices meant the cost of living hit its joint highest level since June 2013.
It’s worth noting that core inflation, seen by some as a more stable measure as it doesn’t factor in volatile energy and food prices, jumped from 2.4% to 2.7%.
Can you beat inflation?
The increase means your savings must work harder to keep pace with the rising cost of living. But with savings rates still miserly, that’s a hard job to do! Especially as inflation always seems to work against us and in favour of the government.
To protect your pot, you'll need to find an account paying at least 2.9%, so long as the interest you earn is within your Personal Savings Allowance for the 2017/18 tax year.
The Personal Savings Allowance (PSA) allows you to earn £1,000 tax-free interest a year if you're a basic rate (20%) taxpayer or £500 tax-free interest a year if you're a higher rate (40%) taxpayer. There’s no PSA for additional rate (45%) taxpayers.
To help you find the best home for your savings, we’ve rounded up the best inflation-beating accounts paying 2.6% or more.
Savings accounts (with strings attached)
August’s increase means there are no instant access or fixed-rate savings accounts that can match the current cost of living.
The small crumb of comfort is that regular savings accounts can still smash that target, with top accounts paying a whopping 5%.
The catch? There are a few, actually.
First off, the rate is only available for one year, after which point the amount you earn will fall dramatically.
Second, they’re really designed to attract new savers as you can’t put in a lump sum, although existing savers can at least funnel up to £300 a month into them before the rate falls after one year.
Finally, the top-paying accounts – from Nationwide, First Direct, Santander and M&S – are only available to current account holders of each specific bank.
Current accounts (with strings attached)
Some current accounts still offer inflation-beating rates and allow a little more flexibility than regular savings accounts.
The Nationwide FlexDirect account offers a top rate of 5% on balances of up to £2,500. However, this will drop to a measly 1% after the first year, so you will need to move your money again. You’ll also need to deposit at least £1,000 a month to benefit from the top rate.
The Tesco Bank Current Account guarantees to pay 3% on balances up to £3,000 until April 1, 2019, but you'll need to pay in at least £750 a month and set up at least three Direct Debits to earn that rate.
Alternatively, there’s the TSB Classic Plus account, which pays 3% on balances of up to £1,500. Unlike the Nationwide deal, the rate doesn’t drop after a year, and you just need to deposit £500 a month and opt for paperless statements to qualify for interest each month.
Other options to consider
If you are saving for a house or your retirement and are under 40 years old, then you could benefit from the new Lifetime Isas.
These allow you to save up to £4,000 of your annual Isa allowance in cash or stocks and shares and on top of the return these offer the government promises to boost what you save by 25% each year.
Skipton Building Society is the only provider to offer a Cash Lifetime Isa at present. It pays a measly 0.5%, but that government – or taxpayer-funded – bonus means you'll get a markedly better rate overall.
With inflation forecast to rise, it might be worth considering moving some of your cash into other places that have more risk but could offer greater rewards.
One option is peer-to-peer lending, where you lend your money to individual borrowers, businesses or investors.
This area currently isn't protected by the Financial Services Compensation Scheme but could offer far higher returns than a high-street account, plus since April 2016, you can hold some peer-to-peer investments in an Innovative Finance Isa which means you can save up to £20,000 tax-free.
Lending Works was the first major platform to launch an Innovative Finance Isa and it it’s offering returns of up to 5%. Read more in Lending Works review: the safest UK peer-to-peer lender around?
Meanwhile, Zopa has launched its Innovative Finance Isa paying up to 6.1%. Read more about it in our review: Zopa Innovative Finance Isa: how it works, rates and how it compares.
This article is regularly updated