On Tuesday evening I tweeted the following:
'NS&I may have removed their index-linked products but tomorrow I will tell you a way savers can still beat inflation'.
But regular readers will be aware that I reneged on my promise as I had a day off yesterday! So now I am back armed not only with an answer but also a rather nice tan. The following is an extract from Moneyweek Saver, a column offering money-saving tips. While most of what they write is pretty naff in my opinion, and not a touch on the money-saving advice within this blog, they did manage to neatly sum up the problem now facing savers, as well as a possible solution, following the withdrawal of NS&I index-linked savings certificates.
First off the obvious bit..... savers need to find the best savings rates if they want to minimise the impact of inflation on their savings. So:
Where are the best savings rates?
In order to see a real rate of growth, your savings rate needs to beat inflation after tax. If it doesn't, then in a year your money's spending power will not be as it is now. A basic-rate taxpayer needs an interest rate of at least 6.25%, and a higher-rate taxpayer, a rate of 8.33% to beat RPI inflation and tax.
Even if you only attempt to beat the Consumer Price Index rate of inflation (CPI) - which is lower than RPI as it doesn't include mortgage interest costs in its calculations - basic-rate taxpayers would need a rate of 4%, and higher-rate taxpayers, 5.33%. Sadly, those interest rates just aren't available. So wherever you save today, you have to accept that you will lose out over time.
The best rate is 4.9% - from the Baroda Max 5 Year Fixed Rate Bond. But I would not recommend locking your money up for five years when interest rates are so low - they can only rise from here. A better time period would be two years: that way when interest rates go up you won't get left too far behind. The Baroda Max 2 Year Fixed Rate Bond pays 3.8%.
If you go for a cash Isa you need a lower rate of interest to beat inflation, as your returns aren't being taxed. But you would still need 5% plus to beat RPI and 3.2% plus to beat CPI. But you can't get these rates either. The best cash Isas available are from Northern Rock and the Post Office who both pay 3% on their one-year bonds.
While the quoted figures were correct at the time of writing, if you want to find the latest and best savings/ISA rates click here. Now for a clever way to get a better interest rate:
The sneaky way to beat inflation
However, all is not lost. There is one sneaky way to beat inflation - make the most of current account deals. Santander offers a rate of 5% on balances of up to £2,500 on their Preferred In-Credit Rate Account. You just have to pay £1,000 a month into the account - if you don't, the rate drops to 0.1% - but that money can simply bounce through the account straight into another one. Add the £100 cash-back you will receive if you set up one direct debit from the account and that easily beats inflation.
Alliance & Leicester offers the same deal but you can't hold an account with both banks. If you do, you'll earn 5% interest on one account and 1% on the other. Just be aware that the rate drops to 1% after a year so be ready to move your money.
I have to stress though that 5% is not technically inflation beating (despite Moneyweek Saver's claims) as a) the retail price index currently stands at 5% and b) 5% is the return before tax is taken off. But for non-tax payers this trick will certainly see their savings (albeit a limited amount) protected from the impact of inflation.