Five ways savers can beat inflation

18 November 2011

There's no easy way to beat inflation. The consumer prices index (CPI) is currently 5% while the retail prices index (RPI), which includes housing costs, stands at 5.4%. Both figures are considerably over the Bank of England's 2% inflation target rate and way above the average annual pay increase - wages have only gone up by 2.8% in the past year.

This means our savings are being wiped away. To illustrate: £10,000 saved five years ago, allowing for an average interest rate of 0.94% and 20% tax, would be worth £9,239 today thanks to the eroding effects of inflation. So what can savers do to combat inflation?


A basic-rate taxpayer would need to find a savings account that pays 6.25% interest to beat inflation, while a higher-rate taxpayer would need 8.33%. The fact that easy-access accounts hover around the 2.5-2.8% mark makes the inflation-beating thresholds look unattainable.

However, there are a few inflation-linked accounts to consider. BM Savings has five-year and three-year inflation linked bonds on offer. The three-year bond pays 0.25% gross interest on top of RPI and the five-year term awards savers with RPI plus 0.5%. The Post Office has two similar inflation-linked bonds, both of which are linked to RPI. Its three-year bond pays 0.25% interest on top of RPI, while its five-year account pays 1% gross interest plus RPI. But those deals are taxable.


Current account holders with First Direct, HSBC and Santander can take advantage of superior interest rates on regular savings accounts.

Both First Direct and HSBC pay existing customers 8% interest for a year's worth of monthly deposits, while Santander pays 5% for 13 months. However, bear in mind you can't deposit a lump sum, and monthly payments are capped – at £300 in the case of First Direct and £250 with HSBC and Santander. This limits the total amount of interest you'll receive.

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A basic-rate taxpayer would have to deduct 20% of the interest paid on their savings, and a higher-rate taxpayer 40%. But saving your money in an ISA will ensure that you pocket all the interest you earn. BM Savings also offers three and five-year inflation-linked ISAs.


A potentially better use of your savings if you own a home could be an offset mortgage. These offset any savings and current account balances you hold with the mortgage-lending bank against the total mortgage amount you have to pay back, so you pay interest only on the balance of the debt.

Reducing the amount of interest means more of your monthly payment can be channelled into capital repayment, so you may be able to clear your mortgage more quickly as well as paying less interest in total.

For example, if you had £10,000 worth of savings offset against a 25-year £100,000 mortgage you would reduce the mortgage term by two years and four months and save £15,042 in interest.


If you are saving for the long term then equities tend to outperform cash savings. Of course, this involves taking more risk, but spread your money across mainstream sectors such as the UK all companies, UK equity income and global sectors. That way you can keep up with inflation, without taking too much of a risk.

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