How can my investments keep up with inflation?

6 December 2011

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.

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