While fixed rate bonds can be a good option for anyone exploring how 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’re exploring how to profit from inflation or looking to diversify your savings portfolio, equity investments may be a good choice. With equity investments, 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.
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 the level of risk that comes with investing for inflation, 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:
Cash ISAs
Stocks and shares ISA
Innovative finance ISA
Lifetime ISA
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.
