Will inflation destroy your savings?

Published by Rebecca Rutt on 02 June 2011.
Last updated on 03 June 2011

Q: I'm trying to become a regular saver. I have some investments and contribute to a company pension, but would also like to start putting away around £300 a month to build up a rainy-day pot.

I don't mind having the money locked away but I would like to be able to keep adding to it. I'm also worried about my money being eroded by inflation.

A: It's great that you want to develop a savings habit and that you're able to put away £300 each month.

The first thing to do is use up your individual savings account cash allowance - £5,340 for this tax year. Although it's hard to find any accounts with high interest rates at the moment, if your money is in an ISA, interest won't be eroded by income tax.

You can either put a lump sum into a fixed-rate account (some of which allow you to top up your investment), or open an easy-access ISA, most of which allow you to make regular payments but offer a marginally lower interest rate.

There are also cash ISAs that track the base rate to ensure your savings won't suffer if rates do rise.

If you've already used up your ISA allowance, you can use a regular savings account. The rates offered are generally higher than those for instant access ISAs, but you will be taxed. These accounts only allow you to put a certain amount away each month.

However, it's difficult to find cash accounts to beat the current levels of inflation, with the consumer prices index at 4% in March and the retail prices index at 5.3%. All the best rates - those paying over 4.5% - can be found in long-term fixed-rate savings accounts, which don't generally allow monthly deposits.

Read: Only two inflation-beating savings accounts left


Francis Klonowski, certified financial planner at Klonowski & Co, says: "The Skipton Building Society Regular Saver issue 2 is fixed at 3.25% for 12 months, and would suit you because you can save up to £500 a month, rather than the normal £250 limit.

"Interest is paid on maturity of the bond after 12 months, at which point it's all transferred to a Skipton easy-access account so you'll need to look for a new account with a better rate. No withdrawals can be made - if you need to withdraw your money, the account will be closed.

"The Leeds Building Society Regular Saver is also a good option, fixed at 3.05% for 12 months. You can save the same amount and also make one withdrawal in the first 12 months, but additional single deposits are not allowed."


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