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Can your savings beat inflation in 2011?

Which? experts analyse your savings options

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Choose the right savings account to get a great return on your money

Is it possible for savings to beat inflation? Which? Money experts look at your options to help your savings keep up with rising prices.

With the government’s preferred inflation measure, CPI, at 3.3% in November and RPI (which includes, among other additional items, mortgage interest payments and council tax) at 4.7%, your savings are having to work harder than ever to beat inflation.

National Savings and Investments (NS&I) savings certificates

NS&I withdrew Index-linked savings certificates from general sale in July 2010 and has yet to announce their reinstatement. However, there is excellent news for customers who already hold these Index-linked NS&I savings certificates – when your current certificates mature you can roll them over into new ones. The product is designed to beat inflation and pays RPI plus 1%. This is currently 5.7% tax free, easily beating rates available from banks and building societies and with 100% backing from the government.

Verdict – can it beat inflation?: Yes, but you need to already hold an earlier version of the product to access new certificates.

Cash Isas

You can pay up to £5,100 a year into a cash Isa. Interest is paid tax-free. Existing current account customers of Halifax, Bank of Scotland and Santander can earn 3% on a cash Isa balance of £5,100. However, this rate includes a 12-month bonus of 2.5%, so you’ll need to switch again in a year’s time to get the best rate.

If you’re looking for a non-tied cash Isa, Santander currently offers 2.85% (including a 2.35% 12-month bonus).

Verdict – can it beat inflation?: No. However, that’s no reason to not switch to get a better rate than you’re earning at the moment. Use the Which? Savings Rate Booster to find out how much extra interest you could earn each year, and start the switching process today.

Fixed-term bonds – both for savings accounts and cash Isas

You can usually get a higher interest rate if you’re willing to lock your money up for longer. However, interest rates are likely to go up in the future and fixed-term accounts come with hefty penalties if you want to access your money early. Think carefully before you lock your savings in – what seems like a great rate today may not look so good if general interest rates are higher in two or three years’ time.

You could earn 3.25% on a fixed-term savings balance of £5,000 with Firstsave if you’re happy to lock up your cash for a year. For longer periods, Coventry Building Society currently pays 4.75% on its 5-year fixed-term savings bond. However, with these accounts you’ll have to pay tax on the interest. The net return for a basic rate taxpayer on the Coventry BS account is therefore 3.8% and for a higher-rate taxpayer 2.85%.

If you put the money into a fixed-term cash Isa instead, you won’t pay tax on the interest. Cheshire Building Society currently pays 3% on its 1-year cash Isa, while Halifax pays 4.25% on its 4-year fixed-term cash Isa.

Verdict – can it beat inflation?: Yes, but only if you’re willing to lock your money up for longer. However, there’s no guarantee that the rate will remain competitive if Bank of England base rate increases while you’re locked in. Use the Which? Savings Rate Booster to find the best rates currently available.

Peer to peer lending

With mainstream savings accounts from banks and building societies struggling to beat inflation, it’s worth considering a peer to peer lending website for some of your savings. Under peer to peer (P2P) lending, savers make loans to other individuals and small businesses. 

However, P2P lending should not be considered as an option for all your savings, but only as part of a balanced portfolio. P2P lending is essentially an investment – if the person to whom you’ve lent money fails to repay their loan, you could lose some or all of your money. If the P2P company fails, you would not be covered by the Financial Services Compensation Scheme (FSCS), although several companies have put safeguards in place that would allow a back-up company to continue to administer your loans.

Peer-to-peer websites include Zopa, Fundingcircle.com, Yes-secure.com, RateSetter.com and Quakle.co.uk. For full Which? reviews, read our guide to peer to peer lending websites.

Rates available tend to easily beat high street banks. For example, lenders at Funding Circle, which lends to small businesses, are currently earning an average gross rate of interest of 8.4%. By spreading your money across a range of credit-assessed small businesses (or other consumers in the case of other peer to peer lending sites), you can reduce the risk of loan defaults damaging your savings balance.

Verdict – can it beat inflation?: Yes, the rates available through sites such as Zopa and Funding Circle can easily beat inflation. However, you won’t get the protection offered by the FSCS if the peer to peer site goes bust. There’s also a risk that the people or companies you lend to will not repay their loan, reducing the return on your cash.

Use the Which? Savings Rate Booster to get the best interest rate

It’s worth remembering though that you could get a much better rate still just by switching to a Which? Best Rate savings account. Use our Saving Rates Booster to see how much you’re currently earning on your savings account and how much extra interest you could be earning by switching to the best account on the market.

Find out more about savings protection under the FSCS

For full details of how your savings are protected, including a guide to which banks and building societies have separate banking licenses and which only offer one lot of £85,000 cover across all their brands, read the Which? guide to Protecting Your Savings.

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