The UK's Consumer Prices Index showed inflation was up to 1.8% in the 12 months to January, meaning the cost of living is now higher than the interest rates on many high street savings accounts. But there are still inflation-beating accounts for your cash out there, if you know where to look.
To protect your money against the rising cost of living, you'll need to find an account paying at least 1.8%, so long as the interest you earn is within your Personal Savings Allowance for the 2016/17 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.
If you’ve used up your allowance you will need to chase a rate of 2.25% if you're a basic rate taxpayer or 3% if you're a higher rate taxpayer.
To help you find the best home for your savings, we’ve rounded up the best inflation-beating accounts paying 1.8% or more.
Here are the accounts that beat inflation right now.
No easy access and notice savings accounts beat inflation at the moment.
If you want to put your money in a savings account then you should look at fixed-rate bonds, although financial data provider Moneyfacts says only 23 of these are inflation-beating and you'll have to lock your money away for at least three and a half years.
Masthaven is offering a 42-month fixed-rate bond paying 1.83% on deposits from £500.
Alternatively, Vanquis Bank offers a four-year fixed-rate bond paying 1.96% on balances from £1,000.
If you are willing to lock your money away for longer, Masthaven offers a five-year fixed-rate bond paying 2.06%, which you can open with £500.
No cash Isas currently beat inflation.
Why current accounts are better
Current accounts offer better rates than savings deals, particularly when you factor in the Personal Savings Allowance and the fact you can get instant access to your cash.
For example, the Nationwide FlexDirect account offers you 5% on balances of up to £2,500 for the first 12 months. However, this will drop to a measly 1% after the first year.
Other banks have cut the interest rate on their current accounts but several still pay 3%. The TSB Classic Plus account pays 3% on balances of up to £1,500.
The Tesco Bank Current Account also pays 3% but on balances up to £3,000. Unlike other current accounts it’s easy to use as a savings account as you don’t have to set up and Direct Debits or deposit a minimum amount each month to benefit.
However, the popularity of this account has caused it to freeze new applications, with no indication of when it will be available again.
Meanwhile, the Bank of Scotland Current Account with Vantage pays 3% on balances of £3,000-£5,000. However, you must pay in at least £1,000 each month and have at least two Direct Debits set up on the account to benefit.
Lloyds Bank's Club Lloyds pays 2% on up to £5,000. You need to pay in at least £1,500 a month otherwise there's a £3 monthly account fee.
For larger balances, the Santander 123 current account pays 1.5% on up to £20,000. It also pays cashback on your direct debits, though there is a £5 monthly fee to consider.
Other options to consider
With inflation forecast to keep rising, it might be worth considering moving some of your cash into other places that have more risk but could offer greater rewards.
If you haven't used some or all of your tax-free stocks & shares Isa allowance, you have up to £15,240 to play with.
Or there's peer-to-peer lending, where you lend your money to individual borrowers or 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.