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No savings accounts beat inflation – here's the best way to protect your money

·4-min read
 A balloon with a pound sign inflation
A balloon with a pound sign inflation

Britain's hard-pressed savers must risk investing their nest eggs in the stock market or watch its spending power diminish even more quickly after inflation climbed to 3.2pc.

No widely-accessible savings accounts can match the eroding power of the consumer prices index, which rose at its fastest recorded rate last month. All cash savings pots will now reduce in real terms.

Most high street bank accounts pay as little as 0.01pc interest. On a balance of £50,000, this would earn just £5 a year. Even savers who managed to snag the best deals face losing hundreds of pounds.

The best-paying one-year savings account on the market, from Atom Bank at 1.5pc, would generate just £76 in interest from the average pot of £5,000 over one year. Meanwhile, inflation would reduce the spending power of this pot by around £164 over the same period.

The only chance of matching inflation, or potentially beating it, is by investing. For cautious savers who are used to keeping their wealth in cash savings accounts, this can be a daunting prospect.

Telegraph Money takes you through the steps you can take to protect your cash, where the opportunities are, and the pitfalls to watch out for.

Where to invest to protect your cash

Jason Hollands of Tilney Investment Management said it was more important than ever to invest cash in stocks and shares given low interest rates offered little-to-no protection.

“Beating inflation should be on everyone’s radar and you cannot do that investing in cash. While stocks can be volatile, overall the market in London offers a dividend yield of around 3.7pc,” he added. “On yield alone investors can stay ahead of inflation.”

Mr Hollands tipped dividend-paying funds TB Evenlode Income and Threadneedle UK Equity Income, which he said offer some stability in an inflationary environment. The funds have returned 22pc and 16pc respectively in the past three years whereas the broad British market, as measured by the FTSE All Share index, returned just 12pc.

Nicholas Hyett of broker Hargreaves Lansdown said large household brands could provide shelter against rising prices.

“Companies such as Coca Cola, Unilever and Reckitt Benckiser can withstand a high inflationary environment,” he said. “Increasing the price of a can of coke by a penny will go unnoticed by the consumer. That allows these businesses to adjust their prices to offset inflation.”

Luxury retailers are also resilient when prices rise, he added, as wealthy consumers benefit from asset price inflation and are less likely to cut spending if prices rise.

Companies such as LVMH Moët Hennessy Louis Vuitton, Richemont and Kering, whose share prices are up 23pc, 17pc and 9pc respectively this year, can ride out tough times.

Another way to protect your savings against inflation is to invest in gold, viewed as a traditional hedge against rising prices.

“One of the simplest ways to gain exposure is through vehicles called exchange-traded commodities, such as the Invesco Physical Gold ETC,” Mr Hollands added.

Renewable infrastructure trusts can also help investors beat inflation, because the long-term contracts in their portfolios are adjusted to accommodate rising prices.

Mr Hollands pointed to HICL Infrastructure and International Public Partnerships, which both have dividend yields above 4pc – but are trading at premiums of 13pc and 16pc to the value of their net assets. “They are not cheap because they offer attractive yields and very predictable income streams,” he added.

Mr Hyett suggested companies in the utilities industry, as their revenues are often regulated to link to inflation. “National Grid is a strong pick, especially as in the long term they will benefit from more people driving electric cars,” he added.

The higher rate of inflation is likely to hurt bond investors the most, since it affects the real value of their typically fixed returns. Mr Hyett pointed to index-linked bonds as an alternative, where interest paid rises in line with inflation.

Mr Hollands also warned that rising prices could have a negative impact on growth investing in sectors such as technology.

“Investors often pay a premium price as they expect the future value of that business to grow. But inflation creates uncertainty about the value of today’s money,” he said.

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