How to... beat inflation

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Five top tips for beating inflation

1. Understand its impact

If savings or earnings rise in nominal terms but fail to beat inflation, their real value will fall in terms of purchasing power, meaning that they will be worth less year on year. Current inflationary pressures have been exacerbated by higher prices for clothing and footwear, food and, in particular, energy and air travel, meaning many people are feeling less well off. Yet whilst there is little we can do about earnings increases being below the rate of inflation, there are several ways to protect your savings.

2. Cash individual savings accounts (Isas)

These should be the first port of call for anyone holding cash, as the interest rolls up free of tax. Up to £5,760 of the £11,520 annual Isa allowance can be saved in cash with one provider. The remainder can be put in an equity Isa, either with the same or another provider.

3. Inflation-linked investments

The most obvious solution is to own financial assets that are expressly designed to offer protection against rising prices. Government-backed NS&I periodically issues savings certificates which are guaranteed to beat inflation. NS&I savings certificates are popular as they are secure and provide returns, after a fixed period, slightly in excess of inflation. Unfortunately the most recent issue of savings certificates has been withdrawn from sale following heavy demand.

4. Cash management service

Cash fares poorly in a period of inflation as its purchasing power erodes. However, there are still good rates to be accessed if you know where to look. Many banks and building societies offer attractive rates but only for a limited period or with certain restrictions. Shop around for the best rates, but watch out for bonus rates, which tend to be slashed after the first 12 months.

5. Investment portfolios

Another approach would be to own assets which benefit from the causes – or, indeed, are the causes – of that inflationary pressure, such as “real assets” – commodities such as oil and gold, commercial real estate and infrastructure, all of which can be accessed quite easily though a well-managed investment portfolio. Such a portfolio would also include shares which over the longer term increase in value at a greater rate than inflation. Investment in index-linked gilts as a specific hedge against inflation would also form an important part of your overall protection.

• Kevin Garfagnini is director at Mazars Financial Planning Ltd