One in three savers doesn’t know how to fight inflation – are you one of them?


New research commissioned by Zurich suggests that just over a third of savers are unsure of how to protect their money against rising inflation.

The survey was carried out by YouGov, and asked 4,000 UK adults what they thought the best way to beat inflation was. The results showed that the most popular methods to beat inflation were:

  • Investing in property (27%)
  • Cash ISAs (13%)
  • Stocks & Shares ISAs (7%)
  • Bank and building society accounts (6%)
  • Investing in the stock market (4%)
  • Pension savings (3%)
  • Other (3%)

37% of people said that they didn’t know.

The results of the Zurich survey are shocking. The fact that 37% of people don’t know how to beat inflation is a testament to the lack of financial education currently available in the UK. The reliance of one in four people on property to beat inflation is also worrying at a time where many experts are concerned about the house price bubble bursting, and the rate of house price growth starting to slow. The fact that only 11% of people suggested that they would invest in stocks and shares to beat inflation is also a worry, as investing is typically seen as a way of maximising returns over the long term.

This gap in consumer awareness comes at a time of relatively high inflation as measured by the Consumer Price Index (CPI), with official figures for April 2017 showing a rise from 2.3% to 2.7%. The level isn’t predicted to drop anytime soon either, with the National Institute of Economic and Social Research (NIESR) predicting a rise to 4% later in the year.

Alistair Wilson, head of retail platform strategy at Zurich, commented: “Rising inflation is eating away at the nation’s savings and the reality is many people don’t know how to fend it off. A gap in consumer awareness over how they can protect their savings from inflation could mean many people will see their wealth simply drain away.”

So, how can you make sure that your savings stay one step ahead of inflation?

Whilst the survey that Zurich carried out gave a number of options for beating inflation, there isn’t necessarily a right or wrong answer. For example, some bank accounts may offer you a high interest rate, some Stocks & Shares ISAs may give a low return and some property investments could lose money.

That isn’t to say that it all comes down to luck, it just means that there are several options available and what is right for one isn’t right for others. The following tips aren’t guaranteed to help you beat inflation, but they will definitely help you to fight it as best you can.

1. Take more risk

Taking more risk with your investments isn’t something that everybody will feel comfortable doing. Investing carries a certain element of risk as it is, but those willing to be more daring with their choices can garner returns that can stay one step ahead of inflation, or with a bit of luck, leave it behind in the dust.

Stocks & Shares ISAs allow you to control the level of risk that you are taking. As a rule of thumb, investors who are prepared to take greater risk should expect a greater reward. However, as we know with all rules of thumb, they don’t always work out like that, and all investments carry a greater risk to your capital than savings accounts. Savers can also consider peer-to-peer lending (P2P), via the new Innovative Finance ISA. Whilst being a relatively new concept, P2P lending has the potential to provide higher returns than traditional savings accounts, but with an undoubtedly greater risk of losing some or all of your capital.

2. Hope inflation starts to slow

The advice to ‘do nothing’ may not sound very helpful, but if and when the rise of inflation slows, the buying power of your money won’t decrease as quickly.

Many events in 2016 have been cited as contributing factors to the high rate of inflation, such as the EU referendum leading to the weakness of the pound, and the American Presidential Election. Economic uncertainty over Brexit means that the Bank of England is less likely to curb inflation by increasing interest rates.

Those with a more optimistic outlook may be crossing their fingers and toes, but the rise of inflation isn’t predicted to slow anytime soon.

3. Be more efficient

Rising inflation and low interest rates will inspire many people to review their savings and investments. There are a number of ways to do this including:

  • Reducing the amount of tax you pay
  • Cutting costs with investments

Reducing the amount of tax you pay can be achieved by looking for more efficient ways of saving. For example, if you find an interest rate that beats inflation, but the amount of tax you pay equates to more than the rate of inflation, you’ll be no better off. In the past, using an ISA was the primary way to protect your savings interest from tax. Traditional savings accounts now have an annual interest allowance that can be earned before paying any tax, with the introduction of the Personal Savings Allowance (PSA).

The PSA means that those looking for tax-free ways to save their money are no longer confined to ISAs, as:

  • Basic-rate taxpayers have a tax-free savings income allowance of £1,000
  • Higher-rate taxpayers have a tax-free savings income allowance of £500
  • Additional-rate taxpayers have no PSA

Cutting costs on any investments you make where possible can also increase your efficiency, as they cut into your returns.

Zurich’s concern that there is a gap in awareness when it comes to inflation is arguably reinforced by the fact that more people believed that Cash ISAs were a better option than Stocks & Shares ISAs. That isn’t to say that there is no hope.

As inflation continues to rise, people will be forced to look for ways to stay ahead, as their buying power continues to be sapped. Simply switching from being a saver to an investor is one way of actively trying to battle inflation, and a combination of all of the above would be another. A lot of it comes down to your own personal view on financial risk, which is why those in doubt should always seek advice before investing money that they can’t afford to lose