Savers saw a swathe of cuts in the fixed-rate bonds on offer last month — the largest month-on-month fall in 15 years.
So it may surprise you to hear me say that savers rang in the New Year in better shape than they have in three years.
That is because, due to the falling cost of living there are now more than 1,100 accounts that beat the current rate of inflation, according to rate scrutineers Moneyfactscompare.
This time last year, and the January before, there was not one (not one!) single account that earned you money in real terms.
But today, for the first time since February 2021, you can enjoy a real return.
Savings grace: Thanks to the falling cost of living there are now more than 1,100 accounts, including easy access and fixed rate bonds, which beat the current rate of inflation
The inflation beast has always been the big enemy of savers. If you earn less interest than the rise in the cost of living, the spending power of your savings falls.
This is the case even if you’re earning what looks like a good rate of interest as high inflation will still wipe out any returns you make in real terms.
Savers have suffered sorely during the latest bout of high inflation, but that has now changed with the rate down to 3.9 per cent from its recent double figure high.
The top one-year bond, from Investec Bank, offers 5.3 per cent, compared to 5.7 per cent in early December — a big 7 per cent drop in just four weeks.
But it’s more than the 3.9 per cent current inflation rate — so you will make a real return of 1.4 per cent if inflation stays at this level.
This time last year, the best one-year bond paid 4.25 per cent from Atom, Zopa and Cahoot banks.
But, back then, the rise in the cost of living was running at a colossal 10.1 per cent and stayed above 4.25 per cent for most of the year. So, even with this top rate, your money would have lost spending power.
February 2021 was the last time you could beat inflation on short term fixed-rate bonds and easy access accounts — and then by a very small margin.
With inflation running at a benign 0.4 per cent, you could earn 0.5 per cent on the best easy access account and 0.71 per cent on the top one-year fixed rate bond.
Although rates are falling, they are still better than last year. That means that if you have a one-year bond coming up for renewal, you will still get a better rate.
The inflation rate is still nearly double the Bank of England’s 2 per cent target, so it is not expected to bring down the base rate sharply, which is good news for savers.
Experts expect rates on easy access accounts to stay around their current levels, where the best on offer is 5.2 per cent from Ulster Bank online. But you will only benefit if you are in a top-paying account.
Figures from Moneyfactscompare show the average easy access rate is only 3.17 per cent or 3.31 per cent on an easy access cash Isa.
Neither is inflation busting — and you could do even worse if you stick with a big bank’s ordinary easy access account where lowly rates vary from 0.25 per cent to 1.45 per cent.
The average one-year fixed-rate bond is a better 5.13 per cent, while the cash Isa equivalent is 4.99 per cent.
In fact, although rates look much poorer than they did before the big financial crisis back in 2008, in reality they are not so different.
Back then, we saw rates we can now only dream of. One-year fixed-rate bonds paid 6.75 per cent and easy-access accounts were 6.3 per cent.
Inflation was around 4 per cent, so you would have got a 2.75 per cent and a 2.3 per cent real return on fixed-rate bonds and easy-access accounts respectively, which is not all that much higher than today.
Be quick and snap up this top rate
Bucking the trend of falling rates, Shawbrook Bank has just raised its rate for new savers on its one-year fixed-rate cash Isa from 4.6 per cent to 5.01 per cent.
The new Shawbrook rate has propelled it to the top of the best buys. Experts advise not to hang around if you see a good fixed-rate and are happy to tie your money up.
They expect rates to fall further this year. And a top rate like this is unlikely to be around for long.
You can earn slightly more in an ordinary fixed-rate bond, with the best rate at 5.3 per cent from Investec Bank. Beware — this is taxable if you exceed your personal savings allowance.
This lets basic rate taxpayers earn up to £1,000 interest in each tax year without having to pay tax. Higher rate taxpayers have a £500 allowance.
If you bust your personal allowance after paying basic rate tax, the 5.3 per cent works out at a lower 4.24 per cent, while higher rate payers see just 3.18 per cent.
You keep the whole 5.01 per cent in a cash Isa because the interest is automatically tax-free.
You can put up to £20,000 into a cash Isa each tax year, which runs from April 6 to April 5 the following year.
