How can I make my savings beat inflation?
What does it mean to say saving accounts "beat inflation"?
Inflation refers to how much the cost of living is rising - and even when inflation is low, it's still the case that making savings pay can feel like fighting an uphill battle.
But we can beat inflation: here's how.
Why inflation matters
There are two major inflation indexes, the consumer price index (CPI) and retail prices index (RPI).
The difference between them is that RPI includes extras relating to the cost of housing such as council tax, mortgage payments and the like while CPI (the Consumer Price Index) doesn't; the figures used are also calculated slightly differently.
In both cases, they look at the cost of a "typical" shopping basket containing those items, and compare it with what it was 12 months previously.
Say inflation is 4%: that means the typical basket is 4% more expensive than it was in the same month a year before.
As we update this article in April 2016, CPI was measured at 0.5% in March - up from just 0.3% in February; RPI stood at 1.6% for March 2016.
The impact on savings
Inflation hurts day to day when it rises faster than wages. The same amount of money buys less.
For savers it hurts in the same way - a pot of cash will be worth less than when we put it aside - except that savers can "beat" inflation with an interest rate that allows the amount to keep up with real prices.
With a 0.5% inflation rate, and with recent changes to tax on savings (more below), most taxpayers only need to find an account paying a little more than that to gain - although recently even traditionally more rewarding accounts have been struggling with that.
In the run up to the end of the 2015 tax year, for example, the average interest rate being offered by cash ISAs was just 0.85% AER.
Inflation rates now
Only a few years ago, savers had real reason to be concerned. In September 2011 CPI hit 5.2%.
Combined with the effect of income tax on interest, that meant a basic rate taxpayer needed to find an account offering at least 6.5% AER if they wanted their money to grow in real terms.
That was the most recent peak, however, and inflation fell dramatically in the months that followed. By the end of 2013, it had reached the Bank of England 2% target, meaning savers only needed to find an account offering 2.5% to beat both inflation and tax.
The inflation rate hovered around the target rate of 2% for six months before plunging again - and since February 2015 it's been at 0.5% or less.
According to Moneyfacts, there were 310 savings accounts that could beat inflation as it stood in March 2016 - and around 200 that couldn't.
How to beat inflation
Of the 10 best inflation-beating savings accounts available at the time of this update, five were ISAs - and six were fixed rate accounts, in which the money is not easily accessible.
The best combine those two elements, in the form of a mid- to long-term fixed rate ISA, with the terms ranging from two years to five.
Particularly for those who've been saving for a while already, ISAs are wonderfully simple. Because they're completely exempt from tax, all they need to do is offer an interest rate just above that of inflation.
Since April 2016, however, many more of us can look at the headline rates being offered and compare them directly to the rate of inflation - because we won't lose a penny of the interest we earn to income tax until we've earned up to £1,000.
We look at just how much this means both basic rate and higher rate taxpayers can save before having to worry about taxed interest, in our full guide to the Personal Savings Allowance, here.
As mentioned above, we're currently in the odd situation of inflation being incredibly low - but given the Bank of England's target of 2% CPI, ambitious savers may want to look for an account offering around that.
Long term fixed rates are the best bet for this kind of planning ahead - and indeed the best fixed rate accounts offered at the moment all offer around 2%.
In less unusual times, an inflation linked account may be worth considering too.
Let's take a closer look.
First port of call: ISAs
As a result of the Government's efforts to make ISAs, and saving in general, more attractive to us, the restrictions on the amount that can be invested in standard ISAs have been made much less restrictive in the past couple of years.
The cash ISA allowance for the 2016/2017 year is £15,260, ending 5th April next year.
As always, those prepared to store their money away longer term can get the highest rates - but we must stay put even if the rates on other products improve over the fixed term.
Bear in mind that while they may not offer attention grabbing rates, many instant access ISAs can and do beat inflation at present.
Charlotte Nelson, financial expert at Moneyfacts, says that with general savings and ISA rates being so dismal, if we spot a good rate we should do our best to make the most of it:
"We've seen that the top rates don't last, and it's very likely that the best accounts will be cut or withdrawn soon after they're launched."
Particularly with accounts that aren't fixed, we can always make sure we don't miss out on a good rate by making a small opening deposit, then topping up the balance later.
Of course, those who have more than the annual ISA allowance to put by may well need somewhere to invest the rest.
That means taking a look at fixed rate accounts.
These accounts can offer quite high interest rates. However, bear in mind that this option often requires putting away at least £1,000 and not being able to touch the money for a minimum of two years.
The trick with any account where we're agreeing to a fixed savings term is to double and triple check the conditions.
There are strict rules regarding early access and the possibility of making a withdrawal; make one small mistake and the penalties can be heavy - including having the account closed, and forfeiting interest for some or all of the term.
Inflation linked rates
The downside to a fixed rate, however, is that it's just that - fixed. At the moment they look attractive - but as the graph above shows, it's possible for inflation rates to change substantially over just two years - and that would mean our account could end up losing us money.
For that reason, some people prefer accounts that offer an interest rate that increases as inflation does.
This usually works in the form of a promise to pay either RPI plus interest (note, not CPI), or a fixed rate, whichever is higher, at the end of an account's life, guaranteeing a return even in the case of deflation.
The problems with these accounts are generally the same as with fixed rates - they require a large initial investment and put strict restrictions on withdrawals - with one additional problem: they're thin on the ground.
When we last updated this article a couple of years back there was just one account open to new applicants. Right now, there are none.
A note on pensions
It's worth noting at this point that inflation is usually associated with one form of saving in particular: pensions.
This makes sense, of course, because we really want to be able to live on the cash we put away.
Many pension schemes promise to beat inflation; previously they were able to do this knowing that when we came to retire we'd have little choice but to receive the majority of the saved fund in the form of an annuity, like a salary.
Just like a salary, annuities are taxed as income, and they've suffered a bad rap for the way they're calculated, and the conditions they often come with. Along with the 2015 pensions changes, it's unsurprising that annuities have come in for a bit of a hammering.
Furthermore, despite being the most tax efficient form of saving there is, many people appear to be choosing to put less in their pensions and more in ISAs and other, more flexible, savings accounts.
This shift is fuelled in part by the expectation that our working lives are only going to get longer - but of course, the less we put into our pensions, the longer we may have to work to be able to afford to retire.
Debt vs savings
Finally, it's fair to say that there's a substantial number of people who really shouldn't be stressing about whether their savings are beating inflation: those with debts.
Investing in savings is great, but with very low rates of interest on money stashed away, paying off debt before saving is often the better choice.
We can see this just from the basic numbers. Earning interest at 3% will never beat paying it at 15% on our credit card debt.
Having said that, those who can't find an inflation busting savings account shouldn't be put off saving all together.
It's always useful to have some funds tucked away should we need them in the future, especially if the alternative would be borrowing - which will only work out more expensive in the long run.