Simon Lambert: Inflation is eating your savings and your bank isn't helping

Inflation is climbing again and that means the value of your wealth risks being depleted.

The consumer price index inflation measure that the Bank of England targets – known as CPI – stood at 3.1 per cent in the 12 months to August, according to ONS figures released this week.

Unless your savings are in an account paying a higher interest rate than that, you are losing money.

If you have money in a 2 per cent savings account, the balance may be going up on paper – or more likely a screen nowadays – but adjusted for inflation it's going down.

For example, £100 a year ago would be £102 thanks to the interest earned, but to maintain its purchasing power it would have needed to rise to £103.10.

In contrast, if you had stashed your cash in a top-of-the-table cash Isa paying around 4.5 per cent, you would have £104.50 – and would still be getting richer in real terms.

And while the Bank of England held rates again yesterday at 3.75 per cent, expectations of future rate rises have pushed top fixed rate savings deals up to 5.2 per cent. 

The Bank of England has kept interest rates on hold but savings rates are rising

The problem is that while there are top deals out there that beat inflation, your bank or building society is probably not helping you, unless you help yourself.

Banks love to let customers slip onto lousy rates, because it makes them money. The Bank of England estimates we have about £300billion in current and savings accounts earning zero interest. 

Financial information specialist Moneyfacts say if that money was instead earning a rate of 4 per cent, it would give UK savers £12billion a year in interest.

But you don't even need to settle for 4 per cent, you can earn more than that. 

Of course, I would hope that as a savvy This is Money reader you already have your savings nicely parked in the best possible interest-paying account.

However, I'm also a realist and know that even our readers can let sorting their savings fall victim to their busy lives.

Yet, with inflation back on the rise and eating your savings it's important to try to avoid this.

Make sure you save in an Isa 

The first step is to get your savings into an Isa. In my opinion, for many of us it is more important to earn interest tax-free than it is to find the absolute best rate.

You can earn interest tax-free outside of an Isa via the personal savings allowance, but the full £1,000 limit is only available for basic rate taxpayers. Higher rate taxpayers get just £500 tax-free and additional rate taxpayers get zero.

Tax has a seriously detrimental effect on the actual savings rate you get. It turns an inflation-beating 4 per cent rate into a wealth-sapping 2.4 per cent rate for 40p taxpayers or 2.2 per cent for 45p taxpayers.

Even basic rate taxpayers would effectively find their savings standing still in a taxed 4 per cent account, as it reduces their actual rate to 3.2 per cent.

A cash Isa protects all your interest from tax, something which only becomes more important as your savings balance and income grow over the years.

You can still put up to £20,000 a year into a cash Isa until next April. From then the cash part of the annual Isa allowance will be cut to £12,000 for under-65s, with the remaining £8,000 being able to go into a stocks and shares Isa.

There's an important question over whether people who can afford to save £20,000 in a year should put it all in cash or should be investing some for higher returns. But that's not the issue here.

If you’ve got cash savings, get as much as possible in an Isa. Read our five favourite cash Isa picks for some guidance.

Check the best savings rates – and switch 

Getting the best possible savings deal should be a no-brainer, but we all tend to fall foul of making sure our savings are earning a top rate at some time or other.

Customer inertia makes banks and building societies a fortune, as they get away with paying a big chunk of their savers less than they need to.

The worst offenders are legacy accounts paying piddly sums. I call these 'insult accounts' as you'd rather be paid nothing than 0.75 per cent. But even accounts still open to new business can pay measly rates, while the vanishing of one-year bonuses can also cost you dear.

Check the best deals in This is Money’s independently compiled savings tables and move your money. And if you haven’t done so already, sign up to our savings alerts to get emails about the best new deals as they land.

We've got the genuine best rates listed for you, and we will email you when top new deals land. There's not much more we can do, now it's on you to act.