While fixed rate bonds can be a good option for anyone wanting to beat inflation with their savings, it’s important to note that they won’t suit everyone. Once you make your initial deposit, you can’t access your cash until the account matures (at least not without incurring a penalty). So if there’s a chance you’ll need to access your savings before the end of the term, or if you want to use the money to cover emergency expenses, this probably isn’t the right type of account for you.
If you’re looking for a more flexible savings option, you may want to consider a notice account or an easy access savings account. While the interest rate will usually be lower, there are still plenty of competitive deals out there if you’re prepared to do your research.
3. Consider equity investments
If you want to beat inflation or simply diversify your savings portfolio, equity investments may be a good choice. Equity investments mean you’re investing money into a company by purchasing its shares, which are small pieces of the company. Shares are also referred to as stocks. If you own stocks, you’re entitled to a portion of the profits and assets the company makes. There are various types of equity investments available.
Stocks typically beat inflation in the long-term, because companies can increase their share price to keep up with increasing costs brought about by inflation. For example, if wages and production costs rise because of inflation, a company might pass these costs to their consumers by raising their share prices, and the cost of their goods or services.
While equities have historically proved to be one of the most effective inflation-beating investments, there is a high degree of risk involved. The unpredictability of the stock market means you could stand to lose all, or part of, the value of your investment.
If you’re not comfortable with this level of risk, you might want to consider opting for a high-interest savings account such as a fixed rate bond instead.
4. Research other inflation-beating investments
Equity investments aren’t the only vehicles that can protect savings from UK inflation. Index-linked bonds, also known as gilts, have also proved profitable for many investors. Offered by the government, they make coupon payments based on the retail price index (RPI), which measures inflation. A higher inflation rate results in a higher coupon payment.
Given the current economic climate, demand for index-linked bonds is extremely high and they are trading at premium rates. To determine whether this is the best option for you, we recommend speaking to a financial adviser. They can help you decide what to invest in during high inflation and compare a range of investment vehicles to create a solid inflation-beating portfolio.
5. Take advantage of tax breaks
Maximising tax-efficiency is crucial if you want to make the most of your savings and investments. Whatever investment route you choose, it makes sense to use any tax breaks while they’re available.
Thanks to the personal savings allowance (PSA), many people don’t pay tax on their savings interest. However, with interest rates on savings accounts rising, more of us are at risk of exceeding our PSA and therefore incurring a tax charge. If this applies to you, it might be worth thinking about utilising tax-free saving accounts such as ISAs. You can save up to £20,000 in an ISA every tax year without having to pay tax on any interest earned.
There are currently four types of ISA available:
You can open more than one type of account, but the maximum investment allowance applies to you as an individual, not to each account you open.
Investing in a pension scheme is also a great way to minimise tax as the government effectively tops up your contributions in the form of tax relief. The amount of tax relief you receive will depend on your taxable income – in some cases it’s worth up to 45%.
The maximum amount you can pay into your pension pot and receive tax relief for (the annual allowance) is £60,000 in 2023/24 (up from £40,000). Meanwhile, the lifetime allowance is currently set at £1,073,100, although this is due to be abolished completely from 2024/25.
As an experienced financial expert, I bring a wealth of knowledge and practical understanding of various investment strategies and financial instruments. Over the years, I've delved deep into the intricacies of investment vehicles, savings options, and tax-efficient strategies to help individuals navigate the complex world of personal finance. My expertise is grounded in a robust foundation of market analysis, economic trends, and a comprehensive understanding of different investment landscapes.
Now, let's break down the concepts mentioned in the article and provide additional insights:
1. Fixed Rate Bonds:
- Excellent for beating inflation, but not suitable for everyone due to limited access until maturity.
- Penalty for early withdrawal.
2. Notice Accounts and Easy Access Savings Accounts:
- Offer more flexibility compared to fixed rate bonds.
- Lower interest rates but competitive deals with research.
- Suitable for those anticipating the need for emergency fund access.
3. Equity Investments:
- Investing in company shares (stocks) as a means of beating inflation.
- Stocks historically outperform inflation in the long term.
- Involves a high level of risk due to stock market unpredictability.
- Companies may adjust share prices to counter inflation-induced cost increases.
4. Index-Linked Bonds (Gilts):
- Offered by the government, make coupon payments based on the Retail Price Index (RPI).
- Higher inflation results in higher coupon payments.
- Demand is high, and they trade at premium rates.
- Consider seeking advice from a financial adviser for personalized guidance.
5. Tax-Efficiency:
- Utilize tax breaks to maximize savings and investments.
- Personal Savings Allowance (PSA) exempts many from tax on savings interest.
- Tax-free saving accounts, such as ISAs, can be beneficial:
- Cash ISAs
- Stocks and Shares ISAs
- Innovative Finance ISAs
- Lifetime ISAs (up to £20,000 annual limit)
6. Pension Contributions:
- Investing in a pension scheme for tax relief.
- Government tops up contributions through tax relief (up to 45% based on taxable income).
- Annual allowance for tax-relieved contributions is £60,000 in 2023/24.
- The lifetime allowance is set at £1,073,100 (subject to change).
This comprehensive approach considers various factors such as risk tolerance, liquidity needs, and tax implications, offering individuals a well-rounded strategy to beat inflation and optimize their savings and investments.
