Savers suffer as inflation rises but can you manage its effect on your money?

03/08/2010
by Lois Avery
Savers suffer as inflation rises but can you manage its effect on your money?

Savers have been hit with another blow following the news that interest rates look set to stick at a low of 0.5 per cent for the foreseeable future.

Bank of England Governor Mervyn King has announced that interest rates are unlikely to rise from their all time low, despite high inflation and strong growth pushing some people to call for a rate rise.

He claimed that recovery was still cautious and warned that it may not be sustainable.

"On the face of it that is encouraging. But we must be careful not to read too much into one number.
And the wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the UK will be sustained."

Low interest rates will be good news for those paying off debts like mortgages but the bad news is that, because of the low rate market, there are very few savings accounts on the market that offer rates good enough to beat inflation.

So is there anything you can do to offset the effects of the recovering economy?

Although it may seem like no account offers enough interest to beat inflation, with experts saying a basic rate tax payer needs an account with a rate of around 4 per cent, there are options to help you make the most of your savings.

ISAs
The first thing to do is to make sure you use your ISA allowance. Some banks are offering these tax-free savings accounts with attractive rates.

George Ladds, head of Investment and Pension Research at Fair Investment Company said:” The best ISA rates available are on fixed rate accounts - between 3%-5.5%. If yours is low, think about making an ISA transfer, which means switching to a better paying ISA account.

"There is no hiding from the fact that interest rates are low, and therefore, savings rates are poor. Those who plumped for a fixed rate last year or earlier may well be smugly watching rates fall as their cash continues to earn considerably better rates than anything on offer now. But that doesn't help those whose deals are coming to an end, or those who didn't fix and are looking for some way to beat inflation.”

If you’ve used up your £5,100 ISA limit then the next step is to look at rates on traditional savings accounts. Unfortunately most are not peaking much above 2 per cent and that’s usually with a fixed term.

But if you can afford to lock your money away then a fixed term savings account is the next best option.

Fixed rate bonds
George Ladds explains why: “Generally, the longer you are prepared to fix, the better the rate you will get,” he said.

“This is because although you are hoping your rate will continue to beat the base rate over the period, you take the risk that rates will go up and you will miss out. However, with predictions that the base rate is not going to budge until 2014, it might be worth the trade off."

But if traditional saving is still not offering the returns you’re looking for and you’re comfortable taking a bit more risk then it may be worth looking into structured investment products.

Structured Products
These bridge the gap between everyday saving and investing on the stock market by allowing savers to gain better returns but with more risk. However, although they are usually based on the performance of the stock market many structures offer capital protected options and they’re backed by the Financial Services Compensation Authority, up to a value of £50,000.

Funds
Funds also offer better returns on longer term investments and you can also use your ISA allowance within this type of investment, with the added benefit of exposure to a variety of stocks.

But the message from experts is that rates are set to remain low for the next few years, meaning savers may be encouraged to tie their money into a rate, knowing that the Bank of England will not be upping the base rate any time soon.

© Fair Investment Company Ltd
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Interest paid either Annually at 4.60% Gross/AER, Quarterly at 4.52% Gross or Monthly at 4.50% Gross. Minimum Deposit £10,000.
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