Savings: A new account to beat inflation


Leeds Building SocietySavers struggling to find a real, above inflation return, will welcome the launch of two new accounts from the Leeds Building Society.

Inflation, as measured by the Consumer Prices Index (CPI), currently stands at 2.80%; savers who receive interest, after tax, of less than this figure, will see the real value of their savings shrink. Since the financial crisis savers have been hit by low interest rates, but the situation has been made worse by relatively high inflation and cuts to savings rates, following the launch of the Funding for Lending Scheme just over a year ago.

For months now, most savers have found it impossible to beat inflation, with the only option for taxpayers being a Cash ISA (Individual Savings Account) from First Direct, paying 3.00% AER. However, the minimum balance of £40,000 required to get this rate, made it impractical for many. Furthermore, savers with this account were recently dealt a blow, when First Direct announced that from 1st November it would be cutting rates for savers with larger balances; rather than paying 3.00% AER the rate will be cut to 2.00%.

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Inflation beating accounts from the Leeds Building Society

However, the Leeds Building Society has recently launched two new accounts which should help savers get a ‘real return’, providing they are happy to tie up their capital for five years and of course, inflation doesn’t rise.

The two accounts from the Leeds Building Society are a five year fixed rate Cash ISA, which currently pays 3.00%, and a five year fixed rate bond, paying the same rate.

The Cash ISA has a minimum opening balance of just £1, whilst £100 is needed to open the five year fixed rate bond, making them both accessible for most savers.

However, whilst the accounts are likely to initially be attractive to savers looking to beat inflation there are drawbacks:

  • Savers need to be sure they can tie their savings up for the full five years as no early access it allowed
  • Whilst the accounts currently beat inflation for ISA investors and non-taxpayers, a small rise in inflation would wipe out the ‘real return’
  • The Bank of England has indicated interest rates are likely to stay low for at least another three years, however this prediction has been treated with some scepticism, with many experts predicting an earlier increase, which could leave savers who have tied up their funds stranded in uncompetitive accounts
  • The new accounts from the Leeds Building Society will not help taxpayers receive an above inflation rate of interest; after tax has been deducted the rate offered is still below inflation

Savers who are prepared to tie up their capital for five years should also consider Shawbrook Bank’s five year fixed rate bond, which, like the Leeds Building Society, pays 3.00% gross. A minimum of £5,000 is needed to open the account and again, capital is tied up for five years.