Millions of British savers have seen the value of their money eroded over the past few months, as the rate of inflation has soared to its highest rate in 17 years.
With the retail prices index now at 5 per cent for the first time since July 1991, basic-rate taxpayers – who pay 20 per cent tax on any interest earned on their savings – now need to earn a rate of at least 6.25 per cent interest just to maintain their savings' value at today's prices, according to Abbey. Anything less than this represents a loss in real terms.
For higher-rate taxpayers, who pay 40 per cent on any interest, any accounts that pay less than 8.33 per cent are effectively losing their customers money in real terms.
The high rate of inflation means that it is more important than ever for savers to search for the best rate. For higher-rate taxpayers, there are no regular savings accounts that pay a high enough rate. But several fixed-rate bonds, such as ICICI's 7.2 per cent 12-month savings bond, come close. FirstSave, Anglo Irish Bank, Icesave and the Post Office also all pay more than 7 per cent on their one-year bonds. However, you won't be able to get your hands on your money during that period.
If you need a savings account from which you can withdraw cash, the best rates are currently in the region of 6.5 per cent. West Bromwich Building Society, for example, will pay you 6.4 per cent, while Bradford and Bingley will pay 6.51 per cent if you're willing to administer your account exclusively online.
One easy way to ensure that your money keeps pace with inflation is to use up your ISA allowance, £3,600 each year. Within an ISA, all savings are exempt from tax, so the best cash ISA rates on the market, such as Britannia Building Society's 6.3 per cent offer, will ensure that basic-rate taxpayers beat both tax and inflation.
If you're worried about your other savings losing value, the good news is that inflation is likely to fall over the year ahead.
One bonus of the credit crunch is that savings rates are much higher today than they might be, relative to the Bank of England base rate of 5 per cent. According to financial analysts Defaqto, just 8 per cent of accounts were paying interest equal to or greater than the base rate two years ago. Today, some 28 per cent of accounts do. This is because banks are continuing to find it hard to raise new funds in the capital markets, so they are keen to bolster their savings balances.
Of course, the difficult conditions mean that your savings may not be as safe as they once were. If your bank or savings provider goes bust, the Financial Services Compensation Scheme will only pay 100 per cent of the first £35,000 in your account. So make sure that you don't keep more than that amount with any single provider – with the exception of Northern Rock and National Savings & Investments, which are Government owned and backed.
It is also worth bearing in mind that if the worst comes to the worst, it may take several months to get your hands on your money. If you're worried about this, you might sleep easier at night by leaving your savings with leviathans like HSBC or Abbey, which have been more financially stable than most of their competitors during the credit crunch.