High inflation is a grim situation for savers. Rising inflation means that a basic-rate taxpayer must find an account paying 5.5pc for their savings to keep pace with the rising cost of living, while a higher-rate taxpayer would need an account paying at least 7.33pc to avoid their savings being eroded.
Not surprisingly, savings accounts offering such high rates of return are few and far between.
While many economists have dismissed speculation that Bank Rate could fall to 0.25pc – George Buckley of Deutsche Bank said there was “very little chance” of a further cut in rates – they will remain low for the foreseeable future.
Some providers are tempting consumers with high rates that come with strings attached.
Yorkshire Building Society and its subsidiaries Chelsea and Barnsley each offer a one-year fixed-rate Isa paying a decent 5pc on a minimum investment of £1,000. However, these rates are available only if savers also invest a minimum of £5,000 in a stocks and shares Isa with Legal & General, where you could lose money.
Savers who don’t want to take on such risks have little choice but to consider tying up their savings for at least two years to get any sort of return on their hard-earned cash.
It is well known that the longer you are prepared to lock up your money, the more interest you will earn. Although average rates on long-term fixed-rate savings bonds have fallen significantly over recent months, with the current average five-year account earning 3.74pc, the lowest average for two years, fixed-rate bonds still beat easy-access savings accounts.
With longer-term bonds you will see even bigger rewards. A three-year fix from United National Bank, for example, would pay you £3,392, compared with £699 from an easy access account over the same period.
However, if you are considering a fixed-term product, you should get your skates on as competitive deals do not hang around for long.
Bonds have a limited lifespan mainly because, when market-leading deals are launched, they are oversubscribed quickly as savers actively try to find the best deal in an environment of rising inflation and rock-bottom rates.