Protect your savings against rising inflation



Rising prices may have forced you to cut back on spending, but it could also be a trigger to rethink the way you save and invest. Inflation has consistently exceeded the government’s 2% target in recent months, with the Bank of England forecasting it could reach 4% by year-end as the economy recovers of the pandemic.

In August, as confirmed last week, consumer prices rose 3.2%. Although the Bank’s Monetary Policy Committee expects this to be a temporary hike, with the rate expected to drop below target level by the second half of 2023, higher inflation high can be painful for your finances.

“Over time, inflation is the biggest risk to your capital,” says Ben Kumar, senior investment strategist at 7IM investment house. “You should always worry about inflation. ”

Shopping: Inflation has consistently exceeded government target of 2% in recent months

In today’s low interest rate environment, beating inflation with a savings account is an impossible task. Figures from rate scrutineer Savings Champion show that the best interest rate for an easy-to-access savings account right now is 0.65 percent – from Tandem Bank.

Locking in your money for a while shifts the dial a bit in favor of savers, but it still won’t come close to 3.2 percent. Go for a one-year fixed rate savings bond and the best rate offered is Atom Bank at 1.5%.

If you’re happy to lock in your savings for five years, Atom will pay a higher rate of 1.86%.

It can be painful to hold money in an inflation-eroded savings account. But it’s definitely a prudent way to make sure you have cash on hand in the event of a financial emergency.

To minimize the impact of inflation, Jason Hollands, director of wealth manager Tilney Smith & Williamson, recommends adjusting your savings strategy.

He says, “In a time of high inflation but ultra-low interest rates, you don’t want to hold more money than you need for long periods of time. To beat inflation as an investor, you need to consider riskier assets such as stocks. ‘

Bonds offered by businesses and government offer higher income potential. But the fixed interest payments available on fixed income bonds mean their value will be eroded by inflation.

Laith Khalaf, head of investment analysis at wealth manager AJ Bell, says index-linked bonds – offered by the government and known as gilts – are worth considering. On the latter, interest payments increase with inflation, providing some protection.

He calls for caution, however, saying: “Given the risk of inflation, demand for indexed bonds is high, so they are trading at higher prices.

“There are also concerns that after 12 years of soaring bond prices, thanks to an ongoing quantitative easing program by the Bank of England, this bubble may burst when the monetary measure ends.”


Those keen on fighting inflation and happy to take on the investment risk should consider the stock market. Last year’s returns outpaced inflation, with the FTSE100 and FTSE All-Share indices generating returns of 15% and 19% respectively. Specifically, when consumer prices rise slightly, it may be advantageous to invest in companies capable of profiting from an inflationary environment.

Kumar says, “Successful businesses have pricing power and can increase their prices without hurting demand. Investing in these companies means that as they increase their prices, you also make money.

Add to that the fact that many companies are now recovering from the tough times they faced during the pandemic, and the outlook for beating inflation from a portfolio of stocks looks positive.

For example, the FTSE100 index offers investors an income of around 3.5% per year. With the potential for additional return on capital through rising stock prices, investors have the opportunity to beat inflation.

Some companies are more protected against inflation than others. Financial stocks – banks in particular – and mining companies often do well during times of high inflation. But Rob Burgeman, senior investment director at Brewin Dolphin, wealth manager, says it’s also worth looking for companies that have built brands so strong that people keep buying, regardless of the price.

He adds: “Consumer staples like beverage giant Diageo and Unilever – owners of brands like Dove, Surf and Vaseline – tend to retain their value during times of inflation because they are able to pass on price increases on consumers without affecting sales.

“A household can cut back on some purchases, but they are less likely to change their favorite laundry or trade in their favorite drink for a cheaper version of their own brand.”

Supermarkets also tend to perform well when inflation is on the rise. Like mainstream brands, they can pass higher prices on to buyers.

Another sector that can help investors keep inflation under control is infrastructure. The demand for new roads, power supplies and telecommunications networks rarely drops.

In addition, companies operating in this sector often benefit from long-term contracts incorporating protection against inflation.

Among the investments recommended by Hollands in this sector are The Renewables Infrastructure Group, HICL Infrastructure and Lazard Global Listed Infrastructure Equity Fund.

Renewables Infrastructure and HICL offer investors an attractive annual income equivalent to around 5.3% and 4.8% respectively – the Lazard fund minus at around 2%. But their stock prices appear to be inflated.

While it’s helpful to consider major economic trends when investing, Kumar says that when it comes to beating inflation, the real key for investors is to stay invested in the stock market.

He says, “Having a well-diversified portfolio that you can leave invested is the best strategy, regardless of what happens to inflation.”


Increasing the range of risks and reorganizing your investment portfolio can help reduce the impact of inflation on your wealth, but it’s also worth checking that the tax authorities aren’t taking more than necessary.

Laith Khalaf, head of investment analysis at wealth manager AJ Bell, says: “Locking yourself in as much as possible in tax shelters is a simple way to protect returns on investment – and to mitigate the impact of inflation. ”

Holding investments in an Isa or a pension is the best way to go. You can save up to £ 20,000 in an Isa this tax year with all returns and withdrawals tax free. A maximum of £ 40,000 per tax year can be paid into a pension with contributions bolstered by tax relief. Tax is only payable when the pension fund is used to provide regular or irregular income.

There is also a dividend deduction which means that £ 2,000 of dividend income in the current tax year is tax exempt. Income over that amount is taxable – with tax rates rising in April next year to partially fund the government’s restart of the National Health Service.

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