The past fortnight have not been kind to savers. Interest rates have now remained at 0.5% for a record 30 months, while inflation – the measure of the costs of items and goods has continued to rise.
The Office for National Statistics has announced that the consumer prices index (CPI) has risen from 4.2% to 4.5% while the retail prices index (RPI) has risen from 5% to 5.2%.
Worse still, last week the government-backed National Savings & Investments (NS&I) closed its popular inflation-linked savings certificates to new investment.
So where can savers turn now if they want to beat inflation? Which? Money has reviewed the market to see what’s on offer.
Unfortunately, there are no best rate cash Isas or savings accounts that are able to beat inflation. The best cash Isa currently comes from Clydesdale, which is paying 4.5% AER tax-free for locking your money up for five years, while Saga is paying 4.65% over five years on its over-50s savings account, although after basic-rate tax this actually only pays 3.72%.
However, the Post Office has recently launched its new inflation-linked bond. It pays RPI plus 0.5% over three years and RPI plus 1.5%. So if you took out the three year bond, you would receive 5.7% in the first year, and 6.7% for the five year bond. RPI is measured every August and the additional interest is added to that rate for each subsequent year on saving.
This could be a real boon for savers but even basic rate taxpayers still won’t be able to beat inflation with the three year product, as a rate of 6.5% is needed to beat RPI taking into consideration tax.
The five year option does beat inflation for basic rate taxpayers but you risk missing out on any growth that might come from a rise in interest rates by locking your money away for so long. Also, if inflation falls in any one year, you only receive 0.5% or 1.5% depending on the term you choose. The bonds close on Friday 16th September 2011.
Structured deposits are fixed and variable rate accounts that link the rate of return you receive to some kind of index. Santander, Yorkshire, Barnsley and Chelsea are all offering structured deposits linked to RPI.
- Santander’s product is a six year account which pays 105% of any growth in RPI. So if the index grows by 20% over the next five years, you could receive 21% gross over the term. If the index falls, however, you’ll get a minimum of 8% gross, or 1.29% AER.
- Yorkshire, Barnsley and Chelsea are selling two Protected Capital Accounts, run by Credit Suisse. The first is a six year product, which pays 100% growth in the RPI, measured between August 2011 and August 2011. If the index falls, you’ll still get a minimum of 16% over the six year period, or 2.5% AER.
- The second product from Yorkshire, Barnsley and Chelsea pays interest on an annual basis over six years. You’ll receive the rate of inflation (measured every June) each year, and if inflation has fallen, you’ll get a minimum return of 0.25%.
Be wary of some structured deposits
Which? has been critical of structured deposits in the past – we think some have been poorly marketed to consumers and often sold inappropriately to consumers by high street banks and building societies.
These accounts do offer some shelter from inflation, and the Yorkshire, Barnsley and Chelsea accounts can be held in an Isa, allowing you to avoid paying tax. However, inflation over the long term can be difficult to predict, and for the products that only pay a return on maturity rather than annually, the minimum rates of return could be poor if inflation falls over the six year period.
Moving away from deposit based accounts, savers could turn to investment to try and beat inflation. One way to do this might be to invest in index-linked gilts. These are loans to the government in the form of bonds, with the rate of interest paid to you in return, and the value of the bond, linked to inflation. They can be bought through stockbrokers or through the government’s Debt Management Office.
A good way to access these is through an index-linked gilt fund, which is run by a professional manager and invests in hundreds of different bonds to generate a return. Over the past year, the average index-linked gilt fund has returned 9%, beating inflation for both basic rate taxpayers and even higher rate taxpayers, who currently require 8.67%.
However, these do put your money at risk, and if interest rates rise, the price of index-linked gilts will fall (as there will be less demand for them), so you could end up losing money. Also, if you buy a gilt directly and there is deflation, you could get less back that you paid in.
Diversified investment portfolio
While gilts may be appropriate for a small proportion of your savings, if you want to invest your money, you should build a diversified portfolio of investments, mixing shares, bonds, property and other investment assets. Equities have traditionally been an excellent way of beating inflation.
Spreading your money around different assets helps to spread risk. If one asset falls in value, the others can help cushion those losses. However, you should always seek independent financial advice before investing your money.