Simon Read: Where can you turn to now to beat inflation?

The withdrawal on Tuesday of tax-free index-linked National Savings Certificates was a massive blow to savers looking for ways to outstrip the ravages of inflation.

The simple fact is that if your savings don't earn more than the rate of inflation, the real value of your money shrinks.

With the best standard deposit accounts paying around 3 per cent and the official rate of inflation - based on the consumer prices index (CPI) - currently 4.4 per cent, savings are shrinking fast. Even with the best paying ISAs offering 3.35 per cent, that still comes in at 4.05 per cent once you've taken tax into account, which is still woefully lower than the inflation rate.

The Index-linked Savings Certificates withdrawn this week, however, paid 0.5 per cent above the traditional inflation measure, the retail prices index (RPI), which currently stands at a higher 5 per cent. That 5.5 per cent was an attractive return that proved too good to miss for the half-million savers who rushed to take out the Certifcates since their launch in April.

Demand was too heavy for the government-run NS&I, which has to work to strict targets set by the Chancellor. "The volume of sales over the past few months is such that our forecasts show we were at risk of exceeding the top end of the net financing range, so we needed to take action to reduce sales," said Jane Platt, NS&I's chief executive.

The Certificates will return, but not until next April at the beginning of the 2012-13 tax year. Even then, they may not be as attractive as this year's offering which, in turn, were less attractive than previous index-linked Certificates which paid RPI +1 per cent.

Beating inflation is an elusive target for savers. It's no good putting cash in fixed rate accounts as returns - no matter how good - can soon be oustripped by rising inflation. So for those who have missed the National Savings boat, what alternatives are out there?

The Post Office has an Inflation Linked Bond available until next Friday paying RPI +1.5 per cent over five years or RPI +0.5 per cent over three years. However, returns are not tax-free which makes the accounts much less attractive than NS&I's. You also have to lock your cash away for the whole three or five years, no early withdrawals are allowed. Cambridge building society has an Inflation Linked Bond available until next Thursday that pays RPI +1 per cent over five years.

Beyond that, it's a question of finding the best rates and keeping an eye out for good deals, says David Black, savings analyst at Defaqto. "Savers must be proactive and regularly review their savings to take advantage of attractive deals such as introductory bonuses and guaranteed minimum rates."

With it being virtually impossible to beat inflation through traditional savings schemes, people should consider stock market investments to get better returns, says Patrick Connolly of advisers AWD Chase de Vere.

"Savers face the dilemma of keeping their money in cash and accepting it will lose value in real terms or taking more risk to try and generate better returns," he points out. The problem, of course, of turning to the stock market is the risk, which many people may not be prepared to take.

The Footsie has been particularly volatile in recent weeks and anybody keeping a close watch could easily get alarmed at its wild swings. This week, for instance, has seen it lurch downwards on Monday and Tuesday only to show signs of recovery on Thursday and Friday. And that's a typical run.

"The best approach is a balanced portfolio containing cash, shares, property and fixed interest," advises Connolly. The theory is that you spread the risk among relatively safe investments – such as cash and fixed interest – with a sprinkling of more speculative shares or maybe property funds.

"For a novice investor a sensible fund choice is Cazenove Multi Manager Diversity, a cautiously managed fund," he says.

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