How can I protect my savings against inflation? [UK]

Question

How can I ensure that my savings keep up with inflation, even after any tax due is taken off the returns?

Answer 1

If your primary concern is inflation, you can buy an Inflation-index bond. This is a widely available bond that many countries offer. In the UK, this is referred to as the "Inflation-linked Gilt", issued by the UK Debt Management Office. These bonds will value the investment in relation to a certain inflation index. In the case of the Inflation-linked Gilt, they use the Retail Prices Index.

Answer 2

In the UK, you could use an index fund or ETF that invests in instruments indexed to the Consumer Price Index. One option is the iShares Barclays £ Index-Linked Gilts (INXG), which

is an exchange traded fund (ETF) that aims to track the performance of the Barclays World Government Inflation-Linked Bond Index as closely as possible.

You still need to take into account commissions, among other factors, and understand that any investment comes with risk. Note that this ETF aims to track the performance of an inflation-linked bond index. It may not succeed all the time. This isn't a fool-proof strategy, unfortunately, because investing is always a trade-off between risk and return. By excepting a higher return, i.e., one that can keep up with inflation, you do bear a higher level of risk.

Vanguard.co.uk has good general information about inflation-indexed instruments and funds too.

Answer 3

Don't forget to buy whatever you use inside one of the tax-free savings vehicle (ie, some sort of ISA or similar), especially if you're a high rate tax payer. If you don't, the 40% tax on it will pretty much make it impossible to get a return anywhere near the rate of inflation.

Answer 4

If you don't need the money immediately I suggest some of the large equity income Investment trusts would be a good way of beating inflation Lowland and City of London are two that come to mind.