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Savings and investment ideas to combat inflation

Savings and investment ideas to combat inflation

26 June 2012 / by Oliver Roylance-Smith

With many of the contributing factors to the headline rate of inflation pointing to a future increase, it is vital to consider all of your options in light of the impact any increase would have. We therefore provide you with a selection of savings and investments which could help combat inflation.

Inflationary pressures building

The recent reductions and current headline rate of inflation could be providing us with a false sense that everything is finally coming under control. However, this is an over-simplistic view of what drives inflation and there are a number of key economic factors which combine to create a future outlook which is far from settled.

The compound effect of future commodity prices, further quantitative easing and the flow of money finally reaching businesses and households could result in a markedly different inflationary environment than is being presented at the moment.

The effect of inflation should be a key deciding factor

One of the most important considerations before making any savings or investment decision is to understand the potential impact of inflation. In combination with our own tax treatment and the effect of any charges on our returns, this can have a significant effect on the most important reason for parting with our hard earned cash – the return we get in our pocket or the net return.

A fixed rate of 4% per annum may look like a sound deal, but if inflation is running at 2.8% and you are at least a basic rate tax payer, your net return is 0.4% each year at the most - not so great, and the longer you fix for, the more pronounced the impact.

Savings – the potential to beat inflation without risking your capital

With the returns on fixed rates seemingly going in one direction, adding the opportunity to receive higher returns within our savings portfolio should be considered. Our selection of fixed rate bond alternatives includes Investec’s 3 Year Deposit Plan which offers to return 17% if the FTSE 100 is higher at the end of the three years than its starting value (subject to averaging).

If the FTSE is lower, you only get a return of your initial deposit and so in hindsight you would have been better off with a fixed rate. However, the 17% return equates to around 5.4% per annum compound and with leading three year fixed rates only paying around 4%, this plan offers the potential for a sizeable increase.

Other popular alternatives include the Enhanced Growth Plan from Cater Allen which offers a return of x2 (200%) any return of the FTSE 100 with a maximum return of 45%. Again, if the FTSE does not go up at all then a fixed rate would have provided a better return, but with leading longer term fixed rates only offering around 4.15%, if you consider the FTSE will go up at least 15% over a similar time frame then this plan offers an attractive option.

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Income investments – the opportunity to keep your income ahead of inflation

By putting your capital at risk you open up opportunities for higher returns which in turn could combat any future rise to inflation.

If you are looking for income, Investec’s Bonus Income Plan offers a fixed return of 7.25% per year whatever happens to the stockmarket, with the potential for a 0.5% bonus for each year the FTSE finishes higher at the end of the year than the value at the start of the investment. Your capital is at risk if the FTSE falls by more than 50% during the investment and is still below the starting value at the end of the 5 year term.

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Growth investments – the potential for higher returns to combat inflation

Another popular investment is Morgan Stanley’s Booster Plan which will provide a fixed return of 70% provided the FTSE has not fallen by more than 15% at the end of the investment term. The plan also includes a feature which allows a return of at least your original capital unless the FTSE falls by more than 50%.

Finally, Investec’s Geared Returns Plan has received noticeable interest with a strong headline return of 82.5% at the end of the five years provided the FTSE finishes higher than its starting value, subject to averaging. Capital is at risk if the FTSE falls more than 50% during the investment term but if you think the FTSE could finish higher, even by a small amount, this is an attractive return equivalent to 12.8% per year compound.

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No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors.

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.

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