PCF Bank 7-year fix is only savings rate to beat inflation

Savers can now find an account which matches inflation thanks to a new fixed-rate bond from PCF Bank paying 2.6% - but to get the rate you have to lock cash away for a whole seven years.

Savers can now find a home for their money which matches the official inflation rate thanks to a new fixed-rate bond launched by challenger bank PCF Bank. 

The PCF account, paying 2.6 per cent, is the best deal available across the whole of the savings market - but there is a catch, savers will have to lock their cash away for a whole seven years.

The launch comes amid a flurry of (relative) competition from the smaller banks, including a new Limited Edition Easy Access Isa from Paragon Bank, paying a table topping 1.05 per cent. 

This week the Bank of Cyprus UK also launched a best-buy easy access non-Isa deal paying 1.3 per cent. 

Savings pot: With dismal Isa rates any competition is welcome news for savers

Savings pot: With dismal Isa rates any competition is welcome news for savers

The new PCF Bank Seven Year Term Deposit Account pays 2.6 per cent on a minimum deposit of £1,000, up to a maximum £250,000.

This is the only savings account which pays a high enough rate to prevent the current rate of inflation eroding nest eggs, but as it only matches the most recent inflation figure, savers may not make any gains in real terms over the full seven-year term.

And many will consider that interest rates are likely to move up over that period, which if savings rates follow suit would leave them locked into a deal for the long-term that paid less that other offers. 

The last time a savings account paid enough to beat inflation was back in April when inflation sat at 2.3 per cent, and Ikano Bank's 5-year fixed-rate bond paid marginally more at 2.35 per cent, according to Moneyfacts.co.uk.

The closest rival deal, paying 2.5 per cent, is PCF Bank's own five-year fixed rate deal. The same rate is also offered by Vanquis Bank.  

You can apply online or by post and the account is operated online or by phone.

Charlotte Nelson of Moneyfacts says: 'This new bond from PCF Bank Limited not only enters the market as the highest fixed bond rate, but is also the only savings rate that currently matches the 2.6 per cent CPI rate.

'With no early access to funds, however, savers must ensure they can commit to the full term before entering into this deal.'

TOP FIXED RATE SAVINGS DEALS

Al Rayan has the top rate in the This is Money independent best-buy saving tables over one year at 2.02 per cent. However the bank is Sharia compliant so this is an 'expected profit rate' rather than guaranteed interest.

The next best offer comes from Shawbrook Bank at 1.9 per cent and Atom at 1.85 per cent. 

Al Rayan also offers the best deal over a two-year term at 2.11 per cent. Paragon, Shawbrook and United Trust Bank sit just below at 2.05 per cent. 

There is little reward for locking your money away for longer, as fixing your rate for three years will get you just 2.2 per cent with Vanquis Bank. 

Good news for Isa savers too

Paragon's new 1.05 per cent Isa can be opened with £1 and pays the same rate as Leeds BS's Limited Issue Easy Access Isa deal.

It will be available from Friday 11 August, and will allow transfers in and a maximum balance of £100,000.

Sitting below the top rates, there are a clutch of accounts paying 1 per cent, or marginally more.

The Post Office's Online Isa offers a rate of 1.01 per cent. But it comes with a rate bonus which falls away after 12 months, leaving a much less attractive rate of just 0.25 per cent.

Virgin Money’s Defined Access Isa pays the same 1.01 per cent but you can only dip into your pot without penalty three times within a year, any more than that and the rate is slashed to 0.25 per cent.

Ford Money's Flexible Isa Saver pays 1 per cent, but it comes with its best-rate guarantee that means that existing account holders will benefit from any rate increases offered to new customers.  

Isa rates still sit below taxable account rates and earlier this week, the Bank of Cyprus UK launched a best-buy easy access deal paying 1.3 per cent.

The launches come as the banks blamed the introduction of George Osborne's tax-free personal savings allowance for savers ditching cash Isas in droves.

HOW MUCH WOULD YOU NEED TO DEPOSIT TO HIT YOUR TAX-FREE SAVINGS LIMIT
Savings rateLower rate tax payer (£1,000 PSA)  Higher-rate tax payer (£500 PSA)
1.5%£66,660  £33,330 
2.5% £40,000 £20,000 
3.5% £28,570 £14,285 
Source: Moneycomms  

While rates are low across the board, savers would need a weighty savings pot in order for their earnings to come close to the £1,000 tax-free savings allowance for low-rate earners and £500 allowance for higher rate earners.

This means there is less motivation to opt for a lower rate on a Cash Isa.

That said, those with larger pots and who want to guarantee they their savings pot remains tax-free longer term regardless of interest rates may still favour a traditional cash Isa.

With a dearth of attractive Isa rates and inflationary pressures, it is more important than ever to hunt around for a decent rate.

Fixed-rate Isa accounts do pay slightly more, but there are currently no Isa savings accounts paying more than inflation.

The best rate you will get on a one-year term is 1.22 per cent from Bank of Cyprus UK, followed by Paragon and Ford Money at 1.2 per cent.

Commit to two years and you can earn a smidgen more at 1.35 per cent with Virgin Money and Shawbrook Bank.

The reward for locking your cash in to a three-year account is slightly higher at 2 per cent with Yorkshire Bank – 0.5 per cent above any rivals.

A five-year term gets you just 0.1 per cent more however with the top deal from United Trust Bank.

THE 5 PER CENT SAVINGS TRICK 

If you're fed up with paltry savings rates an interest-paying current account could help you get better returns on your savings pot.

Savers can find accounts paying as much as 5 per cent, more than double the rate offered on the leading short-term fixed rates. 

This is Money has a regularly updated guide to the best offers carefully chosen by its expert writers in our guide to the top interest-paying current accounts.