There are ways to beat inflation

By Martin Lewis, March 10, 2011
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Many savers feel like they are being battered against the wall. Yet, finally, a chink of good news. There are a range of inflation-tracking savings accounts to ensure your money won't be eroded.

● Why inflation hurts savers

Inflation measures the rate at which prices rise and prices jumped in recent years. January inflation figures showed the highest increase in more than two years. While the official Consumer Price Index (CPI) rate is now four per cent, the Retail Prices Index rate (RPI), which is far more reflective of the price rises most of us feel as it includes housing costs, is a whopping 5.1 per cent.

So think of it like this: you put £1,000 in the bank, enough to buy 10 shopping trolleys of goods. If inflation stayed at 5.1 per cent, you would need £1,051 next year to buy the same 10 full shopping trolleys. Therefore, unless your saved £1,000 earns 5.1 per cent interest (after tax), then the amount in your account will buy less in a year than it does now. Interest rates are so low right now that even the best easy-access savings only pay about three per cent before tax. In other words, pretty much every savings account in the UK is actually a losings account. That said, I am still a big fan of putting money away. You just need to work to minimise inflation's impact.

● Inflation-beating savings accounts

The government-owned NS&I used to have index-linked savings to track inflation, but that closed to new customers last July. Now, three different providers have launched their own versions: Post Office, Yorkshire Building Society and Birmingham Midshires.

● Post Office Five-Year Inflation Bond

If you lock a minimum of £500 away for five years, you will be given the annual RPI rate of inflation plus 1.5 per cent each year. So if the current 5.1 per cent remained the same over the next 12 months, after the first year you will have earned 6.6 per cent. The only downside is that you don't get interest on the interest, taking a smidgeon off your overall earnings. This is also a taxed account, so basic-rate taxpayers will see 20 per cent of their interest disappear and higher-rate taxpayers, 40 per cent.

It is a while-stocks-last deal, so best to do it quickly. Note this is Post Office savings, backed by the Bank of Ireland, not the government owned NS&I. Yet it is still a fully-regulated UK savings account, meaning if you went bust you would get the full £85,000 per person per financial institution savings -safety protection.

● Yorkshire Building Society Cash ISAs

Yorkshire has launched a range of inflation-busting accounts, but its rates tend not to quite match up to the Post Office's. Its main advantage is that accounts are available as Cash ISAs - tax- free savings accounts into which you can currently put £5,100 per tax year. So this is guaranteed to beat inflation.

Its Protected Capital Account Inflation Cash ISA pays you the gross RPI inflation over the five years, plus 1.5 per cent. Though it does have a couple of complex terms, so read them carefully before signing up.

● Are inflation-linked savings worth it?

These accounts track or beat inflation depending on your tax situation, without any risk to your savings.

While that currently looks an amazing offer, with RPI at 5.1 per cent, five years is a long time in the savings market. So while these accounts are competitive right now, it doesn't mean they will be in the long run.

It is quite possible that inflation will be back in control and interest rates will rise to bring inflation under control, meaning you lose out twice.

I would think of it more as an 'inflation proofer' than a guaranteed high rate of return - still useful.

For a full breakdown of the highest-paying instant access and fixed deals: www.moneysavingexpert.com/topsavings

    Last updated: 10:41am, March 10 2011