How can my investments keep up with inflation?
Q: Where can I invest £70,000 with a chance of keeping pace with inflation, without locking it away for more than one year?
A: Philip Pearson is a partner at P&P Invest in Southampton.
There are many places where you can invest and have a chance of keeping pace with inflation but none that are guaranteed.
The top instant access savings accounts are paying around 3%, and if you are a taxpayer you will be liable to pay tax on any interest. The returns are similar for cash ISAs, so neither of these options will help you beat inflation.
A better option may be an inflation-linked account. These offer returns linked with the consumer prices index (CPI) rate of inflation, which stood at 5% in October. Of course, the rate of inflation could rise or fall in the future.
There are a number of index-linked structured products designed to keep up with inflation, although you typically have to lock your money away for five or six years and the returns are usually taxable, bringing down your overall gains.
The most high profile of these products is the inflation-linked bond offered by the Post Office. Choose one that runs for either three or five years and receive a return that is marginally greater than the retail prices index.
However, you can only make one initial payment and can’t access your money during the term, plus all interest earned is subject to tax.
If you don’t mind taking some risk to try to generate better returns, you could look at shares, commercial property or fixed-interest investments - or preferably a combination of all three.
While this strategy will give you the chance to beat inflation, there are no guarantees and you could just as easily lose money. Also, if looking at riskier areas you should be prepared to invest for a number of years. So unfortunately there is no easy solution.
Different approaches are suitable for different people. If in doubt you should take independent financial advice.
Structured products offer returns based on the performance of underlying investments. Many products are linked to a stockmarket index such as the FTSE 100 or a “basket” of shares. There are generally two types of product, one offers income, the other growth and investors have to commit their capital for the prescribed term, usually three or five years. The investment is not guaranteed and if the index or basket of shares does not perform as expected over the term the investor might not get back all their capital.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).