How To Protect Your Savings From Inflation

How To Protect Your Savings From Inflation in the UK?

As inflation rises, the power of your money decreases. Considering this, questions are bound to come up about how to protect savings from inflation in the UK. We’re going to explore a range of advice that can help you answer that very question, including general strategies, UK-specific strategies, and a host of practical steps you can use today to help protect your hard-earned savings against inflation.

Understanding Inflation and Its Impact

Inflation is the level of increase in the prices of goods and services purchased by households. As prices for the things you buy increase, the money you have loses some of its value. Inflation historically rises consistently over time, so the value of a single unit of currency is constantly eroding, however slowly.

This can have quite a significant impact on savings, particularly in periods of high inflation such as what the UK is experiencing in 2023. Inflation reached a peak of 11% in 2022, and although it’s now dropped below 5%, this still has considerable knock-on effects. As of November 2023, the average easy-access savings rate (based on an account of £10,000) was 3.17%. This means that unless this interest drops below this mark, the average savings account is losing purchasing power each year.

If you ignore this and allow your savings to continue to be outpaced by inflation, you’re risking your long-term financial goals and likely extending the time it will take before you can retire.

Inflation is difficult to predict. Various economic factors can come into play, with financial institutions consistently reacting to world events to keep inflation or deflation in check. Recent incidents such as the COVID-19 pandemic and economic headwinds following Brexit have led to monetary policies that directly impact inflation in an attempt to control it and keep it within reasonable limits.

Strategies to Protect Your Savings From Inflation

Considering how easily inflation can silently eat away at the value of your savings, it’s so important to be proactive in trying to protect them. Some good practice is to diversify your investments to include some assets that tend to historically outperform inflation rates.

Government Bonds

With bonds, you essentially loan the government money for a fixed number of years. The government, in turn, will guarantee to pay back your investment in full along with a fixed interest rate known as a yield. UK government bonds, commonly known as gilts, have hit 25-year yield highs as recently as October 2023. Inflation typically sends these yields higher, making them a strong means to protect against inflation at a relatively limited risk compared to most assets.

Index-linked Gilts

These are continually adjusted to meet inflation as it rises. This allows them to retain their real value, further protecting your investment against the effects of inflation.

Tangible assets 

This includes real estate and commodities, which are another common hedge against inflation and typically hold their value well regardless. However, real estate in particular is still quite vulnerable to any major economic incidents, as evidenced by the financial crisis of 2007/2008 and the resulting housing bubble collapse.

UK-Specific Savings Instruments

There are several saving options available to you when trying to protect your savings from inflation in the UK specifically. 

An individual savings account (ISA) offers account holders tax-free interest payments on held sums of up to £20,000 a year. 

There are four distinct types of ISA:

• Cash ISAs
• Lifetime ISAs
• Innovative finance ISAs
• Stocks and shares ISAs

Each of these has its own distinct set of benefits and advantages. Cash ISAs are arguably the simplest, as they effectively act as tax-free savings accounts. However, stocks and shares ISAs have also gained significant popularity in recent years as investing continues to get more and more approachable. While these accounts are subject to the ups and downs of individual stocks you select, the account itself offers no tax on any dividends, growth, income, or interest from any of your investments.

Other UK-based saving products you can consider are premium bonds and index-linked savings certificates. Issued by National Savings and Investment (NS&I), premium bonds can be purchased for as little as £25. Instead of earning interest or a dividend, each £1 of premium bonds bought is assigned a unique number and entered into a monthly draw for regular cash prizes of up to £1 million. Unfortunately, these can be rendered less valuable as inflation rises, but this can be offset by any prize money earned throughout their lifetime.

Practical Steps for Everyday Inflation Protection

Outside of your savings and investments, making small but considered changes to your everyday financial habits can help protect you from the effects of inflation.

It’s important that you consistently review your household spending to ensure it remains in line with inflation. As everyday household costs rise, you must have a keen understanding of where exactly this is affecting you most. Two likely sources are gasoline and groceries. If you’re finding that you’re overspending here, shopping around — even locally — might be able to help offset some of the cost increases you’re experiencing.

Consider cutting some small expenses if needed. Your budget review might unearth some spending that might be going to waste. This can commonly happen with recurring subscriptions that you may no longer get enough use out of to justify. Keep in mind though, that these cuts don’t have to be forever. They’re just a measure to help for the time being.

Finally, invest in your financial literacy. Investing here doesn’t have to mean spending money. There’s a whole world of excellent information on finance available to you for free online. Even learning about current inflation rates and the most common economic indicators can make a significant difference to your overall financial decision-making, allowing you to protect your savings from inflation even more effectively.

Concluding Thoughts on Inflation

Battling against inflation can feel like an uphill struggle, but diversifying your investments, allocating funds to inflation-protected securities, and taking action in your everyday financial decisions can help you protect and future-proof your savings. Do your best to be proactive with your finances by staying informed on what’s happening in the world, particularly when it comes to key economic indicators for inflation. 

Take control of your finances now by assessing your current situation and strategy. Consider enlisting the help of a trusted financial adviser to guide you through these processes and to help unearth strategies that can pay off for you in the long run. The Openwork Partnership’s approach ensures that we’ll take the time to understand exactly what you’re looking to achieve and then develop a plan. 

Get in touch today so we can help you face your financial future with confidence and optimism.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.