Options running out for savers as inflation hits 14-month high

Hot air baloons

The consumer prices index (CPI) rose to 2.9% in June, according to the Office for National Statistics, bringing the measure of inflation to a 14-month high.

Although inflation did not hit the 3% that was widely anticipated – thanks in part to falling European airfares – that fact will do little to appease savers struggling to keep apace with inflation, let alone beat it.

According to Patrick Connolly, an independent financial adviser at Chase De Vere, a basic-rate taxpayer now needs a savings account paying in excess of 3.625% gross to outstrip inflation, while a higher-rate taxpayer would need an account paying north of 4.833%.

Savers in cash ISAs – who do not pay any tax on their interest - need accounts paying 2.9% plus to see any real growth.

But according to Andrew Hagger, personal finance commentator at Moneycomms, there are currently no mass-market instant access or fixed-rate accounts that meet this criteria. "Even the new seven-year fixed-rate bond from Skipton Building Society only pays 3.5%," he says.

From the entire universe of savings accounts, Hagger says there are only five that beat inflation and all of them have limitations that will prevent the majority of savers from accessing them.

Find the best Cash ISA or savings account for you

Top rates

Building societies West Bromwich and Kent Reliance both have regular savings accounts, paying 4% and 4.1% respectively, but they require you to pay in a respective £250 or £500 a month. First Direct also has a regular saver account paying 6%, as does HSBC, paying 4% and 6% but all of these are open to current account holders only.

In the ISA market, First Direct is topping the tables with an account paying 3% tax-free but this is only available on balances over £40,000.

Making matters worse, Connolly says that savers also need to consider their own rate of inflation might be higher than the official figure.

"A personal rate of inflation looks at the expenditure related to an individual and it is usually the case that older people will spend a higher proportion of their money on items such as food and utilities, which tend to rise faster than inflation. The double-whammy for older investors is that they are the people who are most often reliant on their savings," he explains.

This is increasingly forcing savers into making some tough decisions, as Connolly explains: "The ongoing dilemma for savers therefore is whether to accept that the spending power of their money is continuing to fall or take more risk in the hope of generating better returns."

Those who are very cautious, or who cannot afford to tie up their money for five years or more should stick with cash – chasing the best interest rates and making the most of their £5,760 ISA allowance to ensure they don't pay any unnecessary tax on their interest.

Alternative investments

Other investors however can look to alternative methods of generating income or growth. Connolly says: "The best strategy is usually to invest into a range of different asset classes such as shares, fixed interest and property, in proportions depending upon the circumstances, requirements and attitude to risk."

Find the best Investment ISA

He adds: "This approach can provide investors with a good degree of diversification and the growth potential to beat inflation over the medium to long term. However, there is also the risk that they could lose money in both real and absolute terms."

Alternatively, those that are happy to take an increased risk, but don't want to invest in the stock market can investigate the opportunities posed by peer-to-peer lending. Hagger says: "There's no protection from the Financial Services Compensation Scheme, but the providers have their own safety nets in place. RateSetter for example operates a provision fund to protect lenders (savers) and so far nobody has lost a penny."

Current rates available for savers on Ratesetter range from 3.2% fixed for one year to 5.1% for five years.

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