How savers can cope with rising inflation

As the cost of living continues to increase, what can consumers do to make their cash work harder? Chiara Cavaglieri investigates

Savers were left struggling this week after official figures showed that inflation remained unchanged at 3.1 per cent last month, ending a three-month period of decline.

Despite a fall in fuel prices, the UK Consumer Prices Index (CPI) is still well above the Bank of England's 2 per cent target after a surge in the cost of air fares, clothing and food.

The news leaves savers with an even bigger challenge to protect their money from the rising cost of living. With interest rates low, high inflation means that the actual value of savings is steadily shrinking, leaving anyone with a nest egg watching it languish in a low-interest account.



"The average instant access savings rate is still at rock bottom at a rate of only 0.77 per cent," says Darren Cook, from the financial comparison site Moneyfacts.co.uk. But what can savers do to make their cash work harder?



One of the best ways to combat inflation is to use up your individual savings account (ISA) allowance and take advantage of the tax-free returns. There are only 51 ISAs to choose from that beat inflation and, of those that accept transfers in, Halifax is a best buy paying 4.25 per cent on its fixed-rate, four-year bond. Derbyshire building society also pays a healthy fixed rate of 4.25 per cent, but again you'll lose access to your money, this time for five years.



Elsewhere, savers need a rate high enough to beat both tax and inflation to maintain the spending power of their money. For a basic rate taxpayer this means finding a savings account paying 3.88 per cent just to break even – and with only 91 out of a possible 1,020 savings accounts paying this, there are few options. Again, this means savers are forced to lock their money away.



No variable, easy access account comes close to beating 3.88 per cent and the best returns require savers to put their money away for five years, which carries the risk of missing out on better rates further down the line. Both Aldermore and ICICI Bank UK pay the top rate of 4.75 per cent on their five-year bonds, for example, but if you only want to hold your money in their two-year bonds, the returns fall to 3.75 per cent and 3.70 per cent respectively.



For a higher rate taxpayer losing 40 per cent of their interest in tax, beating inflation is almost impossible, with only a return of 5.17 per cent able to maintain the real value of their savings. Even worse, many of the accounts that do offer higher returns require savers to open riskier investment products as well. For example, Yorkshire building society and the Barnsley, which it owns, offer combination bonds paying 6 per cent but these require a further investment of £5,000 in a longer term investment product from Legal and General.



Things have been made even more difficult after the withdrawal of the five-year ISA from National Counties building society, offering a rate of 1 per cent plus the retail prices index (RPI) until autumn 2015.



For the short time that it was available, this was the only account guaranteeing an inflation-beating return, after the closure of National Savings & Investments' (NS&I) index-linked certificates in July – although NS&I's customers are still able to roll over their investment into the same issue.



With deposit accounts struggling to offer decent returns, savers should consider riskier investments which may be less vulnerable to inflation.



"For those concerned about rising inflation the best way to protect your income is to invest in assets which can grow the income generated. This can be done through shares where companies can raise prices to compensate for the inflationary effects, and can increase dividends," says Adrian Lowcock, from independent financial adviser (IFA) Bestinvest.



Equities are an important part of a diversified portfolio and have historically provided the best long-term protection against inflation, with defensive sectors such as pharmaceuticals and tobacco remaining relatively strong. Likewise, gold has also traditionally been used as the classic inflation hedge.



"Gold tends to shimmer brightest under the backdrop of rising inflation. I believe the best gold strategy is investing in a fund that has exposure to companies exploiting the asset class – BlackRock Gold and General is my preferred fund in this area," says John Kelly, from the IFA Chelsea Financial Services.



M&G has even launched a corporate bond fund, which aims to keep up with inflation using the CPI as the benchmark, although investors should consider a fund with no track record with a healthy dose of caution.



"It will appeal to those investors who are concerned about the future outlook for price inflation. However, it is important to remember that the gilt yields are near all-time lows, and with investment-grade corporate bonds closely correlated to gilts, now could be a bad time to be buying into some corporate bonds," says Martin Bamford from Informed Choice, an IFA.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing
News
i100

Other places that have held independence referendums
Sport
Jonas Gutierrez (r) competes with Yaya Toure (l)
football

Newcastle winger reveals he has testicular cancer - and is losing his trademark long hair as a result

PROMOTED VIDEO
Arts and Entertainment
Blossoming love: Colin Firth as Stanley and Emma Stone as Sophie, in 'Magic in the Moonlight'
film

Actors star in Woody Allen's 'Magic in the Moonlight'

News
peopleThe Times of India said actress should treat it as a 'compliment'
Arts and Entertainment
Maxine Peake plays Hamlet at Manchester's Royal Exchange
theatreReview: Maxine Peake brings emotional ferocity to Shakespeare's most starring part
News
news

Watch this commuter wage a one-man war against the Circle Line
News
We are phenomenally good at recognising faces; the study showed that humans have been selected to be unique and easily recognisable
science

Human faces unique 'because we don't recognise each other by smell'

Property
Home body: Badger stays safe indoors
lifeShould we feel guilty about keeping cats inside?
News
A male driver reverses his Vauxhall Astra from a tow truck
news

Man's attempt to avoid being impounded heavily criticised

Arts and Entertainment
US pop diva Jennifer Lopez sang “Happy Birthday” to Gurbanguly Berdimuhamedow, president of Turkmenistan
musicCorporate gigs become key source of musicians' income
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig believed to be donning skis as 007 for first time
Student
The Guildhall School of Music and Drama is to offer a BA degree in Performance and Creative Enterprise
student

Arts and Entertainment
Pulp-fiction lover: Jarvis Cocker
booksJarvis Cocker on Richard Brautigan
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Recruitment Consultant - Soho - IT, Pharma, Public Sector

    £20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Payroll & Accounts Assistant

    £20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week