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How your savings options stack up against inflation Go compare with our comparison table

How your savings options stack up against inflation

12 July 2011 / by Paul Dicken

The rate of inflation in June was 4.2 per cent, a dip in the rate at which the cost of living is increasing from its 4.5 per cent high in May.

The level of the Consumer Prices Index (CPI) was driven down primarily by the cost of recreation and culture, the Office for National Statistics said on 12 July, providing some respite from the upward path of CPI inflation in recent months.

Despite this, the level of inflation remains significantly over the target two per cent level, which is a battle for savers looking to maintain the purchasing power of their deposits when interest rates stay at the 0.50 per cent level.

Instant and easy access

While not beating inflation, some of the best instant access savings accounts available are paying near to or around three per cent AER.

This includes the Nationwide MySave which has a minimum deposit of £1,000 and allows one free withdrawal a year. Like many instant or easy access accounts, the headline 3.05 per cent AER interest is boosted by a temporary 1.51 per cent bonus for 12 months.

Compare instant and easy access savings accounts »

Short term fixed rate bonds

Shorter term bonds, of up to two years, can offer attractive rates without tying your money up for too long. For example, the Post Office 2 Year Online Bond offers 3.96 per cent AER fixed. The account can be opened with deposits from £500, but no withdrawals or additional deposits are allowed.

On even shorter terms, an account from First Save is offering 3.50 per cent AER, fixed for one year on deposits of £1,000 and above.

Longer and medium term fixed rate bonds

If you are willing to tie your money up for periods of three years or more, then returns are getting close to or above the current rate of inflation.

For three years, the Post Office pays savers 4.21 per cent AER on its 3 Year Online Bond, with a minimum £500 deposit and no withdrawals or further deposits allowed.

Fixing for even longer carries a greater risk of interest rate rises making the return on your deposit uncompetitive in the longer term.
Savers happy to bear this risk in exchange for a slightly higher return today may look at the Birmingham Midshires 5 Year Fixed Rate Bond which pays a 4.65 per cent AER fixed interest rate. You can withdraw funds from the bond during the term but there will be an interest charge for doing so.

Compare the latest fixed rate bond deals »

Structured deposits and investments

Structured deposit plans generally offer the potential for a higher, above inflation return.

This return is normally linked to the performance of a market, such as the FTSE 100, so is not guaranteed, but capital is protected in a similar way to a deposit savings account. Plans are for fixed terms which could be between three and six years.

Compare our latest range of structured deposits »

Structured investments do not offer capital protection but can offer higher returns for this additional risk.

A new five year investment plan from Morgan Stanley offers a potential return linked to the FTSE 100 Index and inflation. The plan will pay a fixed income payment of 5.25 per cent after the first year and 1.5x any annual increase in the Retail Prices Index (RPI) each year of the plan thereafter.

Find out more about our latest range of income structured investments »

No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular investment or product please contact us for advice.

Some structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated, in which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.

© Fair Investment Company Ltd

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