Updated: Wed, 16 Jan 2013 01:00:00 GMT | By lovemoney.com

How to beat inflation

Interest rates on savings accounts have fallen in recent months, which means that keeping up with rising prices is harder than ever. We look at what options are open to you.


How to beat inflation

How to beat inflation

This week’s inflation figures were disappointing. Consumer prices rose by 2.7% over the year to December which was a bigger rise than many experts had expected. What’s more, several other measures of inflation suggest that prices actually rose by a fair bit more than 2.7%.

Even worse, interest rates on savings accounts continue to fall.

The problem has been the Government’s Funding for Lending scheme. This scheme started in 2012 and it provides banks with extra funds to lend to home owners. In theory, it should boost mortgage lending in the UK.

That’s all well and good, but the scheme has also reduced banks’ appetite for savings cash. After all, if banks are getting more cash from the government to lend out, they don’t have to obtain so much money from savers. As a result the rates paid on many savings accounts have been cut.

Tax

These cuts are especially painful when you remember that if you want to get a true inflation-beating return on your savings, you have to take tax into account. So if you put your money in an account that paid 2.7% a year, you’d only receive 2.16% once income tax at 20% had been deducted.

So if you’re a basic rate taxpayer (20%) and you want to beat inflation, you need to find an account that pays 3.37%. If you pay income tax at 40%, you need to find an account that pays 4.5%.

The top-paying savings account right now is the FirstSave 5-year Fixed Rate Bond which pays 3.05%, closely followed by the Vanquis Bank 5-year High Yield account which pays 3.01%. These rates are better than nothing, but they don’t beat inflation for taxpayers. Indeed there are absolutely no conventional savings accounts paying as much as 3.37%, let alone 4.5%.

Peer-to-peer lending

However, there is a better option. That’s peer-to-peer savings. This is where you lend directly to other individuals via a peer-to-peer website. This new method of saving – and lending - began in 2005 and it’s really beginning to gain critical mass now. More than half a million people are now signed up to Zopa, the largest peer-to-peer website.

Even if your savings pot is on the small side, say £1000, you’ll still end up lending to a large number of people which means that you’ll still get a good return if a small number of lenders can’t repay their debts. (In reality, the number of defaults is very low because the peer-to-peer sites normally concentrate on borrowers who have very good credit histories.)

And the great news is that the returns can be very attractive. If you were willing to lend your money out for five years via RateSetter, you could expect to get a 6% annual return. And if any of your borrowers default, you’ll be compensated by Ratesetter’s ‘Provisional Fund.’

Ratesetter also offers pretty decent returns over shorter periods. If you locked your money away for just a year, you’d still get a 3.5% return.

Stocks & Shares ISA

Another way to juice up the return on your savings is to take some risk and invest in the stock market.

Of course, the stock market isn’t for everyone. Share prices can be very volatile and there’s a significant risk you could lose money, possibly a lot of money.

However, the longer you stay invested in the market, the lower the risk. That’s because markets usually go up in the end.

If you don’t think you’ll need your money for ten years or more, there’s a strong case for putting at least some of that money in the stock market. Then there’s a decent chance you’ll get a strong inflation-beating return.

The simplest way to invest in the stock market is via an index-tracker fund. So if you bought a fund that tracked London’s FTSE All-share index, your investment would move up and down in line with the index. So if the FTSE All-share went up by 10%, your investment would go up by roughly 10% too (minus charges.) One of the best funds that track the All-share is the Fidelity Moneybuilder UK Index fund.

If you put your index tracker fund in a Stocks & Shares ISA, you won’t have to pay any tax on your investment either. Your total ISA limit this year is £11,280, of which up to half can go in a Cash ISA.

Cash ISAs

When it comes to Cash ISAs, we have a bit of good news. There are four Cash ISA accounts that will pay you an inflation-beating return. Here they are:

Account

Type of account

Interest rate

Minimum deposit

Access

Notes

Coventry 60 Day Notice ISA (2)

60-day notice account

3.1%

£1

Online, phone post or branch

No transfers in. Rate includes 0.6% bonus for 1st year. Rate is guaranteed until 29 November 2013.

M&S Bank Advantage Cash ISA

Instant access

2.75%

£50

Phone or post

Applications must be made by January 21st. Rate will be cut to 2.25% on 5 March. Can transfer in from other ISAs.

HSBC Cash e-ISA

Instant access

2.75%

£15,000 if you want to get 2.75% interest rate

Can only be opened online or ISA transfer but can manage account via branch or phone

Can get 2.1% rate for £9,000 to £15,000 balance, and 1.75% for smaller amounts.

Transfers in permitted. Only available to HSBC current account customers.

Earl Shilton 90 Day Cash ISA

90 day notice account

2.7%

£10

Branch or phone

Can transfer in

Remember you can’t pay more than £5,640 into a Cash ISA during this tax year. Your total ISA limit is £11,280

Still want a savings account?

If you have more than £5,640 in savings to squirrel away, a Cash ISA may not be enough for you, and you may want to go for a conventional savings account – even if the returns are behind inflation. So here’s a table with the top savings accounts right now:

Account

Kind of account

Interest rate

Minimum deposit

Notes

FirstSave 5 Year Fixed Rate Bond 1st Issue

5-year fixed rate bond

3.05%

£1000

Online only, interest paid annually

Vanquis Bank High Yield

5-year fixed rate bond

3.01%

£1000

Online only

FirstSave 3 Year Fixed Rate Bond 5th Issue

3-year fixed rate bond

2.95%

£1000

Online only, interest paid annually

Wesleyan Bank Fixed Rate Deposit (3-year)

3-year fixed rate bond

2.85%

£1000

Online only

Vanquis Bank 3 year High Yield Bond

3-year fixed rate bond

2.76%

£1000

Online only

Islamic Bank of Britain Sharia compliant Fixed Term Deposit

2-year fixed rate bond

2.8%

£1000

Sharia compliant, so you’re receiving ‘anticipated profit’ rather than interest

Wesleyan Bank Fixed Rate Deposit (1-year)

1-year fixed rate bond

2.5%

£1000

Online only

West Brom WebSave Plus 3

Instant access account

2.3%

£1000

Online only

13Comments
17/01/2013 13:38
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I cant believe how dishonest the banks are in this country, it is an absolute disgrace that they hold our money but do not pay a decent amount of interest - what is worse is that this is encouraged by the government and what is even more disgraceful is that the public put up with it
17/01/2013 14:27
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lesley i agree but i believe things are unlikely to change. the public are vastly un-aware or un-able to change. education is only answer. school mathematics should concentrate on banking, budgeting and finance. prevent these problems
17/01/2013 14:15
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Sadly all true, but the shareholders would not agree with it.                                                         Generally better deals and benifits are from institutions that consider all account holders as shareholders i.e. Building Society's.
17/01/2013 18:10
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There is a very obvious conspiracy whereby the rich want to keep the workers/taxpayers down. They want us to have no money.
17/01/2013 17:00
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Why are we investing in getting banks lending?  Surely that requires people to have free cash in their pockets to put down deposits/fees of moving!?  Something I'm fairly sure is also lacking, why not put funding into small business loans to employ more people and put cash in the population's pockets?
17/01/2013 16:54
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Unfortunately it has nothing to do with 'English' banks and the proof is that if you try to invest your money in France or Canada or Thailand etc you will not get much better interest; otherwise everybody would put their money in 'foreign' banks and then 'English' banks would have to raise their interest rates. As this is not the case it is clearly a global banking situation. Lastly, remember that the biggest 'English' bank is the Hong kong and Shanghai Banking Corporation (of China) otherwise known as HSBC. Lol. 
17/01/2013 19:45
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How can we the people get any resolve to this without our Government on their side it's the BIG RIP OFF BRITAIN AGAIN IF EVERY SINGLE PERSON COULD SEND THE GOVERNMENT COMPLAINT & JAM UP THEIR SYSTEM BY COMPLAINING THEN NOTHING WILL EVER CHANGE IT'S UP TO WE THE PEOPLE TO AGREE & DO THIS I KNOW IT'S NOT NICE BUT THEIR POLICY IS EVEN WORSE WE ALL NEED TO FIND OUT HOW WE CAN DO THIS THEN THEY WILL BE FORCED TO LISTEN TO US ALL FULL STOP!

22/01/2013 17:20
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who is able to put their money away for 10 years -rediculous!!! Need it now to pay all the bills.
23/01/2013 13:58
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What you get with low interest paid is safety among other things. E.g. Greek banks pay 5.5-6% for 6 months deposits. Will you transfer your money in Greece?
24/03/2013 22:17
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What a set of rip off merchants the financial institutions are, paying miserable interest rates to savers then charging extortionate interest rates on loans and credit cards. 
28/01/2013 23:20
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Low savings % rates arent a problem to a growing number of working class people; they have no savings left to worry about.
28/01/2013 11:10
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The 24 million Savers should abstain from voting at the next General Election, or, only vote for the Party that pledges immediate support for Savers.
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