Protect your savings from inflation

While low interest rates are good for people with mortgages it isn’t necessarily good news for savers with their savings being hit with rising inflation, which in real terms means that you are getting a negative return on these savings.

The average easy access savings account currently pays 0.97% gross on a £1,000 balance – although some pay as little as 0.01% and the highest paying account pays just above 3%.

So how do you beat low interst rates and rising inflation to inflation proof your savings.

So, is there anything you can do to inflation-proof your savings?

You can invest in Open Ended Investment Companies (OEICS) or unit trusts that  have funds investing in inflation linked and/or other fixed rate investments that are targeted to have a return that matches or betters inflation.

There is no guarantee that they will meet their targeted performance and there is also capital risk in that the price of the units can fluctuate.

Most of these funds invest in gilts rather than corporate bonds.

M&G Investments has recently launched its UK Inflation Linked Corporate Bond Fund that invests in index-linked corporate bonds, Floating Rate Notes, index liked gilts and other fixed income instruments. It aims to achieve a return that beats CPI over the medium to long term.

Aegon’s Inflation Linked Fund also specifically aims to outperform inflation, although it can have up to 60% exposure in equities.

Bear in mind that you may have to pay an initial charge to buy an OEIC – or a bid/offer spread in the case of a unit trust – and that there will also be an annual management charge.

You can hold these funds in a stocks and shares Isa which would remove much of any potential tax liability. If held outside an Isa you may be subject to income tax on interest received and capital gains tax on any gain when you sell the units.

If you want to invest in an OEIC or unit trust you can do so either directly through the provider or through an independent financial adviser.

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