At the moment, it is very difficult to protect savings from being eroded by inflation.
CPI inflation is 3.5%. A broader measure of inflation RPI is 3.7%. Yet, with base rates very low (0.5%) it means we have a negative real interest rate.
Real interest rate = nominal interest rate (0.5%) – inflation (3.5%) = -3%
This is one of the highest negative real interest rates on record. Furthermore, there is no sign of a rise in interest rates. At least later in the year, inflation should fall back a little. – Some of the spike in inflation is due to temporary factors such as VAT and petrol.
But, the unfortunate reality is most savers are seeing a decline in the real value of their savings.
If you paid tax on your saving income, you would need a saving rate of around 4.2%. But, the average saving account is currently paying 0.88%. It’s not a good time to be a saver.
What Can you Do to Protect Savings from Inflation?
- Diversify into Government Bonds which offer higher interest rates. The drawback is that this is a volatile time for the value of bonds sold on open market.
- Look for a fixed-rate cash ISA. from Leeds Building Society pays 4.6pc. THe drawback is that your cash is tied up for five years.
- Offshore Investments. Barclays are offering offer shore investment accounts which promise upto 6% AER.
- National Savings & Investments’ Index Linked Certificates. These offer savers a guaranteed inflation plus 1%
- Buy into Gold. The ultimate protection against inflation. Gold will hold its value and become more attractive during periods of inflation. However, G.Soros has described Gold as the ultimate bubble. It’s value can go down as well as up.
3 comments ↓
Soros is right about gold, in my opinion. If you look at world demand, it’s going down. The only people buying gold are investors. Which makes it a lottery. Could keep going up, or could pop.
Two more things to consider to beat inflation – equities, which grow earnings ahead of inflation over time, and commercial property REITS or similar, where the value of the properties held will tend to increase with inflation over time.
People need to make sure they have used their ISA allowances up before the end of the tax year and check other ISA’s if they have ISA’s over a year old. Some banks are offering much better interest rates on new products but not offering these to old customers….so look to move your ISA if you are being paid a pitiful amount of interest.
Also some decent rates on a few fixed rate bonds available like the ICICI 3 year bond paying 4.60% with an option of monthly interest.
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