Fight back against inflation

Updated on 07 December 2011 | 5 Comments

The value of most people's savings is being eroded by inflation, but you can fight back.

Inflation fell a tiny bit to 5.4% this month. That’s welcome news but the sad truth is that nearly all savings products pay less than that, and most of them pay much less than that. So if you have money in a savings account, the real value of your cash is probably falling. 

That’s very frustrating, but there are some things you can do to protect the value of your savings. So let’s take a look: 

Fixed rate savings  

If you want to get a market-leading return on your money, it often pays to lock up your money in a fixed rate bond

Sadly, the rates on even the best-paying bonds don’t match inflation right now. However, don’t write these bonds off just yet. We think there’s a good chance that some of the bonds will deliver an inflation-beating return over the long-term. 

Let’s look at Yorkshire Bank’s five-year bond as an example. It pays 4.7% a year as long as you keep your money locked away for the full five years. Obviously, that’s a lower rate than inflation right now, but there’s a good chance that inflation will fall over the next few years. 

So if inflation fell to 3% in 2013, Yorkshire would still pay you 4.7%. OK, the taxman will take that down to 3.73% if you’re a basic rate taxpayer, but that’s still an inflation-beating return! 

Of course, five years is a long time, but you could still get a 4.1% interest rate if you signed up for a three-year bond with Halifax.  

Still there are no guarantees that inflation will fall, and fixed rate bonds might never become inflation-beating products over the next five years. So if you want more certainty, we need to look at inflation-linked products. 

Inflation linked 

The last time we wrote about this topic, we recommended some inflation-linked bonds from the Post Office. Sadly these bonds have now been withdrawn, but don’t give up hope completely. 

One option is the BM Savings five-year inflation rate bond which pays out 0.5% a year plus the rise in the Retail Price Index (RPI). 

If you’re able to lock away your money for eight years, then a new corporate bond from Tesco might appeal.

If you invested £2,000 in this bond now, you’d get a 1% dividend (or coupon) every year. This would increase each year in line with the Retail Price Index (RPI). After eight years, you’d also get your original £2,000 back plus any rise in the RPI.  The minimum investment for this bond is £2,000.

This bond is in some ways more like an investment product than a conventional savings account. And it’s not protected by the Financial Services Compensation Scheme (FSCS), which means that you’d lose your money if Tesco went bust. 

What’s more, you’ll have to buy the bond via a stockbroker, and it will be traded on the London market like a share. The trading price will change frequently, but the important point is that you’ll definitely get all your money back – plus inflation – if you hold your bond for the full eight-year term. 

You can also put this bond within an ISA wrapper. If you do that, you won’t have to pay any tax on the money you make. 

Cash ISAs 

That raises the question of cash ISAs in general. Are there any inflation-beating cash ISAs out there? 

The short answer is no. But there are some fixed rate ISAs that aren’t far below inflation. The five-year fixed rate ISA from Governor Money/ Bank of Ireland will pay out 4.5% a year for the next five years. If inflation falls, that could turn into a great inflation-beating rate, and you won’t have to pay any tax to boot. 

If you only want to tie up your money for four years, the Halifax Fixed Saver ISA will pay you 4.3% a year. 

Social saving 

You could also get a tasty return if you went down the social saving route. In other words, you would lend your money to other individuals and businesses, and you’d receive interest in return. Social saving websites enable you to lend your savings to a large number of borrowers which greatly reduces the risk. 

Zopa is the best known website in this area but other sites such as FundingCircle and RateSetter are now making their presence felt. 

FundingCircle claims that savers are currently earning an average of 8.4% on its site (before fees and bad debts.) That’s well ahead of inflation but the rate is variable and could easily fall in the future. 

Overall, it’s hard to get an inflation-beating return, but hopefully we’ve shown that it’s not impossible – especially if inflation falls over the next couple of years. So the message is clear - don’t give up and accept rotten rates. Be proactive and fight back!

More: Which savings account could you get?  |  Eurozone crisis poses threat to your money 


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