The rising cost of living means increasing numbers of people are feeling the pinch, which is why it is more important than ever before to ensure your savings are working as hard as possible for you.
To counter the effect of increasing inflation, you need to earn decent real returns. Real returns are what you are left with after inflation and tax has been stripped out.
Put another way, rising prices mean that the value of your savings is being automatically eroded as time goes by. That means you need a return on your savings, after tax, that is at least equal to the inflation rate, currently 4.3 per cent, to ensure that your savings maintain their ‘real’ value.
Fortunately, despite the fact that interest rates haven’t increased recently, savings rates, particularly on fixed rate accounts, have seldom been higher.
If you want to inflation-proof your savings, then first make sure you use your tax-free individual savings account (Isa) allowance. You can shelter up to £3,600 this tax year in a cash Isa, free of income tax and capital gains tax.
For those who have already used their Isa allowance this year, then fixed rate accounts are definitely worth a look as many are currently offering interest well in excess of 7 per cent. Birmingham Midshires, for example, on July 4 launched a one-year fixed rate bond paying a massive 7.17 per cent gross interest a year on a minimum investment of just £1. The maximum balance that can be held is £10m.
The account also offers monthly interest, for savers who require an income, at a rate of 6.93 per cent gross. No withdrawals or additional investments are allowed once the bond has been opened.
For those who can afford to lock up their savings for a couple of years, West Bromwich Building Society on July 2 introduced Issue 14 of its E Bond, paying 7.12pc gross interest a year until the end of July 2010.
There are also accounts available which are specifically designed to counter the effects of inflation.
National Savings & Investment’s (NS&I) index-linked three and five-year savings certificates, for example, pay a tax-free amount equivalent to the current Retail Prices Index, plus another one per cent, making the current rate 5.3 per cent.
Similarly, Leeds Building Society’s two-year Inflation Buster Bond guarantees to pay an interest rate that matches inflation as measured by the Retail Prices Index (RPI), currently 4.3 per cent, plus another 2.5 per cent. That means if RPI is at 4.3 per cent, the bond pays a return of 6.8 per cent. However, it is worth remembering that the rate of inflation paid on this account is the rate of RPI on April 30, 2009 in year one, and April 30, 2010 in year two. If inflation has been brought under control by then, this means that the rate you actually receive could possibly be lower than on some other accounts.
Whichever account you go for, it is essential to regularly review the interest you are paid – or risk earning less than the rate of inflation and losing out in the long run.
By Melanie Wright