With average interest on instant access accounts less than 1%, and CPI at 4.5%, rising prices can quickly eat away at your cash
Britain's savers have been left with very few options if they want their nest-egg cash to keep pace with inflation. So how can you make the most of your money?
This week's latest official data revealed that inflation as measured by the consumer prices index remained unchanged at 4.5% in May, amid predictions it could hit 5% in the coming months. Inflation measured by the retail prices index stayed at 5.2%.
According to Moneyfacts, a basic-rate taxpayer needs to find a savings account paying 5.63% a year in order to earn a real rate of return on their money ? yet the average interest offered on an easy access savings account is just 0.89%. It says the effect of inflation on savings means that �10,000 invested five years ago, allowing for average interest, inflation and tax at 20%, would have the spending power of just �9,441 today.
Not surprisingly, National Savings & Investments (NS&I) has seen a rush of people applying for its index-linked savings certificates now they are back on sale. The five-year certificates allow anyone aged seven or over to invest between �100 and �15,000 per issue. They guarantee that your investment "will grow in spending power each year, whatever happens to the cost of living", and pay the RPI inflation rate each year plus an average of 0.5% over the five years ? all tax free. NS&I says on its website it expects this issue "to be on sale for a sustained period of time" ? but if you are thinking about signing up the advice is not to dawdle.
Independent financial research firm Defaqto points out there are also a few savings products from banks and building societies which have returns linked to RPI. They include:
? Santander's new Inflation Linked Bond (Issue 1) ? which has a five-and-a-half-year term and offers a maximum return of 110% of the growth in RPI over the period and a minimum return equal to 3.37% a year. Savers receive their initial deposit back at the end of the term, plus at least the minimum return. You can deposit from �1.
? The Yorkshire building society's Protected Capital Account (PCA) Inflation Linked 6 Plan has a six-year term. At the end of the period you receive 100% of any percentage increase in RPI between June 2011 and June 2017, or a minimum return equivalent to 2.79% a year, whichever is the greater. If you invested �10,000, the minimum return at maturity would be �1,800. "If you keep your investment in the plan for the full term your capital is 100% protected," the Yorkshire says.
What about the more 'standard' accounts? Long-term fixed-rate savings bonds offer some of the highest interest rates ? 5%-plus in some cases. However, you need to be happy to tie up your money for a few years, and the minimum investment will sometimes be �1,000 or more. Moneyfacts best buys include:
? Secure Trust Bank's Fixed Rate Bond 5 Year Term (Series 1) ? paying 5.1% gross on a minimum deposit of �1,000. You have to apply by post, and this account is expected to close to new money on 30 June. No withdrawals can be made during the term of the bond.
? Birmingham Midshires' 5 Year Internet Fixed Rate Bond pays 5.05%; the minimum you can put in is just �1. You can take money out for a charge of between 90 and 365 days' interest, depending on how long the account has left to run.
? The AA's 5 Year Fixed Rate Savings Account pays 5% and has similar terms to the Birmingham Midshires.
Cash Isas can also be good payers, but there are restrictions on how much money you can put in, which will of course limit how much interest you can receive. The AA was top of the instant access cash Isa table late this week, with an internet account paying 3.35% in the first year (this rate includes a 1.65% interest bonus for the first 12 months). You can invest any sum from �500 up to �5,340 in this tax year, and it offers "unlimited access to your money with no-notice withdrawals". However, transfers from other cash Isas are not allowed.
Close behind was Santander with its Flexible Isa paying a "guaranteed minimum" 3.3% for 12 months. The account tracks at 2.8% above the base rate for one year. After that, it pays a variable rate ? currently just 0.5%. You can open an account with �1-plus and save up to �5,340 this tax year.
David Black, an analyst at Defaqto, says: "To make the most of their money, people need to be proactive and regularly review their savings to see whether they can get a better deal elsewhere. There are some attractive deals available, such as introductory bonuses and guaranteed minimum rates, and people should seek to take advantage of these. In addition, savers should look to use their Isa allowance and consider fixed-rate deals to achieve a higher return."
Source: http://www.guardian.co.uk/money/2011/jun/18/saving-inflation-beating-products
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