Twenty gilt-edged ways to beat inflation

Published on Thursday 16 September 2010 15:46

The cost of living continues to rise, but there are many ways you can fight back, writes Teresa Hunter

INFLATION remains stubbornly high, according to the Office of National Statistics, and continued to erode wages and income from their savings last month. The Consumer Prices Index, which excludes housing costs, came in at 3.1 per cent, while the Retail Prices Index, including an element of housing, slipped only slightly to 4.7 per cent, down from 4.8 per cent in July.

Air travel was up 16 per cent, twice the rate of a year ago. The price of clothing climbed by 2.8 per cent and food is also becoming more expensive, particularly bread and cereals which are up 1.2 per cent. Protecting finances against the scourge of inflation will be a top priority for many households this weekend.

But there are no easy solutions. Sheltering your wealth from the ravages of inflation is more difficult than ever, now that National Savings scrapped its attractive index-linked savings certificates. Building societies have followed suit and also withdrawn their inflation busting offers.

Cutting costs may be the only way to stay afloat in the months ahead. Scotland on Sunday has come up with twenty ideas to beat inflation.

1 Reduce your food bill

The website mySupermarket.co.uk claims it can take 20 per cent off your food bill by scanning the four main supermarket chains to find the cheapest store and items for your shopping list. It reckons that very few of us need travel more than three or four miles out of our way to find the cheapest prices.

2 Cut your energy costs

Make sure you are on the cheapest energy tariff, as paying over the odds can cost hundreds of pounds annually. Many financial comparison websites, such as uswitch, and which.co.uk, will help you find your best option. This can change from time to time, so check regularly.

3 Slice petrol costs

Find the cheapest station in your area at www.petrolprices.com.

4 Be smart shopper

The price difference between the exactly the same Mp3, laptop or widescreen TV can run to hundreds of pounds depending on where you shop. Research and buy the cheapest by using sites such as www.pricerunner.co.uk, or www.kelkoo.co.uk

5 Mitigate your mortgage

Homeloans are not as easy to come by as two years ago, but if you have a good credit history, a stable address and a decent amount of equity, you should have no problem remortgaging. Standard variable rates are not as attractive as they once were, so keep an eye out for the best deals.

6 Get driving costs down

Consider moving to a smaller car but do your homework thoroughly. Check out insurance and tax brackets before you buy as some similar cars can come in surprisingly different groups. Drive less, either by walking short journeys, or using public transport. Consider alternatives, such as a car share or club. Always share journeys if you can, or get a bike. If you must drive, make sure you tyres are inflated correctly. Ten per cent under- inflation leads to a 2.5 per cent reduction in fuel efficiency, not to mention a 15 per cent acceleration in the rate of tyre wear.

7 Peer into parking

Hunt out the cheapest places to park. Free is best or check out www.yourparkingspace.co.uk, where individuals rent out their drives or parking spaces.

8 Shop now to avoid VAT hike

VAT is rising from 17.5 per cent to 20 per cent in January. If you have any big purchases you need to make, such as carpets, furniture, a new bathroom or kitchen, it makes sense to bring them forward.

9 Take an interest in savings

Low interest rates and higher inflation are double trouble for savers, as the buying power of your income is eroded over time. But there are steps you can take. It is essential to protect your savings from tax, so open a cash Isa. After that use best buy tables (see Page 9) and the internet to search out the best returns. Exploit telephone, postal and online savings, as you no longer have to invest via a local branch.

10 Lock into a good rate

There is a range of fixed-rate bonds on the market paying more than 4 per cent if you tie your money up. But one-year bonds will pay nearly 3 per cent and leave you free to move your money, when interest rates finally start to rise.

11 Don't forget the kids

Children have personal tax allowances too. Parents can use them to cut rates of tax on their savings.

12 Index-linked gilts

Another way to protect against inflation over the longer term is via index-linked gilts. These are issued by the government at regular intervals, and can be bought at issue and held to redemption or traded during their term like any other investment.

Essentially the government promises to pay you a fixed return on top of inflation for the privilege of borrowing your money for a set period. These are known as fixed interest or gilt-edged securities, because they are believed to be very safe.

They pay a small interest, known as a coupon, six-monthly, which is taxed as income, although the final maturity is free from capital gains tax. Both the income and capital return is index-linked. You can buy gilts via banks, stockbrokers, the government's Debt Management Office or in gilt funds. However, financial advisers believe that the enormous demand for index-linked gilts currently makes them too expensive.

13 Global Government Bonds

Alternatively you can buy into funds investing in bonds issued by companies.

14 Reduce your debts

One of the best returns on your savings is to reduce the interest you pay on your debts by paying back the money you owe credit card companies, banks and mortgage lenders.

15 Off-set mortgages

You can earn a good tax-free return by off-setting savings against your mortgage.

16 Index-linked pensions

Those planning retirement are particularly nervous about inflation, and it is possible to shelter your pension from price rises via an index-linked annuity. However, these are expensive and will cut your initial retirement income significantly, as much as by half.

For example, a man aged 60 with 100,000 pension pot could buy a flat pension of about 7,000 per year. However, if he wants to index-link it he will only get about 4,000 at outset. In very rough terms, you need to live 18 years after retirement to be better off with an index-linked annuity.

Better ways to boost your retirement income are to make sure you maximise the potential of any health problems, via an impaired annuity, delay buying an annuity until the latest possible moment, and opt for a 3 per cent annual escalator rather than guarantee of index-linking.

17 Buy Gold

Restricted supply means that gold has traditionally been used as a hedge against inflation over the long term. It can provide insurance against extreme movements in other assets.

18 Life insurance

The cost of cover is falling all the time as life expectancy goes up. See if you can cut your monthly premiums.

19 Credit cards

Make sure you have a low interest credit card. Better still, cut it up.

20 Absolute return funds

Read more: Absolute beginners can earn big returns