How can your savings beat inflation?


Inflation rose last month, with CPI increasing to 3.7% in December.

The Bank of England predicts that inflation will decrease towards the end of the year and into 2012. However, the opposing view is just as prominent with many believing we are entering a period of ‘stagflation’ where the economy is stagnant but inflation remains relatively high.

Interest rates are at an all time low, and are likely to stay low, despite calls for them to rise.

So, how do savers get a real return above inflation?

Firstly, before you go hunting for an account, you need to know what rate of interest you are targeting.

Not only do you need to find an interest rate greater than inflation, but most of us pay tax on the interest we receive, this also has to be taken into account. The following table shows the gross rate of interest needed by savers to beat inflation:

Tax rate Gross interest rate needed to beat inflation
0% or Cash ISA 3.70%
20% 4.625%
40% 6.17%
50% 7.40%

Which deposit accounts pay enough interest to beat inflation?

0% or Cash ISA savings

Cash ISA investors would have to tie up their money for at least three years to get a return above 3.70%.

Click here to see Cash ISAs which beat inflation .

Non taxpayers who are not saving using a Cash ISA would have to tie up their money for at least two years to beat inflation.

Click here to see the two year fixed rate bonds which beat inflation.

20% tax payer There is currently only one account, offered by the Coventry Building Society, which pays a gross rate of interest sufficient to beat inflation.

This account has a fixed term of five years.

Click here to see details of this account.

40% and 50% tax payers There are currently no accounts paying a gross rate of interest sufficient to beat inflation.

Beware long term fixed rates

It is clear that to get an inflation beating interest rate you will have to tie up your savings for at least two years in the case of a non taxpayer, three years for a Cash ISA investment and five years for a basic rate tax payer.

However, a note of caution needs to be sounded when it comes to longer term fixed rates.

Whilst fixed rates may look attractive at the moment it is possible that in years to come inflation will fall and interest rates rise. If you have committed to a long term fixed rate without access to your savings you could be left in an uncompetitive account with no choice other than to remain there to the end of the term.

Unfortunately there are no easy answers and the situation is not likely to get clearer in the short term.

What are the other alternatives to just using savings accounts?

If you want no risk to your capital, the options you have are limited essentially to deposit accounts, and as we have shown, the options are few and far between.

The withdrawal of National Savings & Investments (NS&I) Index Linked Certificates has left a large hole in the options available. Occasionally, accounts with interest linked to inflation are available; Birmingham Midshires have recently launched such an account, click here to see details. However these are few and far between and often sell out quickly.

If you are prepared to accept some risk to your capital you could look towards investing your money in different types of assets, such as equities, gilts or corporate bonds, to try and get a return which will keep pace with inflation.

Clearly such a decision should not be taken lightly; your capital will be at some degree of risk, no matter how low risk your portfolio is.


Many experts predict inflation will continue at around its current level for the remainder of 2011, and the Bank of England are showing little signs of increasing interest rates.

So what do you do?

  • Use your tax free allowances such as Cash ISAs
  • If you are married or have a partner, hold savings in the name of the person with the lowest tax rate
  • Shop about for the best deals, keep your eye out for accounts with interest linked to inflation
  • Beware of lengthy fixed rates which do not allow you access to your savings
  • Consider, very carefully, other assets classes

Our advisers are of course here to help, they can be contacted on 0115 933 08445, 0845 074 7778 or by email at