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How to get your savings to beat inflation
There aren't many inflation-beating savings options around, and consumers need to act quickly before they disappear.
by Michelle McGagh on Nov 19, 2012 at 15:44
A hike in inflation means savers are being hammered once again as interest rates fail to keep pace, but there are ways to eke out a bit more from your savings or at least stop them being eaten away.
Last week the Bank of England announced inflation, as measured by CPI, has increased to 2.7% from 2.2% - exactly the opposite of where the Bank wants to go as it has a target of 2% for inflation.
It has already been tough for savers to get any respectable return on their investments and the increase in inflation is going to make it even tougher. To outrun inflation a basic rate taxpayer needs to earn 3.37% a year on their savings and a higher rate taxpayer 4.5%, according to price comparison website Moneyfacts.co.uk.
Of the thousands of savings accounts available just 40 standard accounts and ISAs are paying above inflation for basic rate taxpayers, and higher rate taxpayers do not have any access to non-ISA savings that will beat inflation.
Negating the impact of inflation is an important part of saving, which is why it’s not a good idea to stuff your money under the mattress. If you had invested £10,000 five years ago and been taxed at 20% but been paid average interest, your money would have the spending power of just £8,899 today – not a pretty picture.
Where should I put my money?
The truth is that if you want to beat inflation, you need to be prepared to lock your money away and the longer you lock it away for the better.
United Trust Bank is offering 3.35% on its five-year Fixed Cash ISA, for transfers into the product only. The Halifax ISA Saver Fixed – five year bond – is offering 3.2% and if you want to lock your money away for slightly less time, Halifax offers a four year option paying 3.1%.
If you don’t want to or can’t afford to tie your money up for a longer amount of time Coventry Building Society has a 60 day notice ISA paying 3.25% and Cheshire Direct Building Society is paying 3% on its Direct Cash ISA (issue four), which includes a 2% bonus until 31 January 2014.
Charlotte Nelson, finance expert for Moneyfacts.co.uk, said: ‘After a brief spell of falling inflation, savers now have to face up to the reality of it rising yet again.
‘Savings rates are continuing to fall, so investors face a real struggle to generate any sort of real return…This time last year to obtain a rate of 3.1% you could choose an easy access account but now if you were looking for a similar return you would have to tie your money down for up to four years.’
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