How to protect your savings against inflation

Inflation, growth of food sales or growth of market basket or consumer price index concept. Shopping

Inflation impacts spends and savings - Credit: Getty Images/iStockphoto

With inflation on the rise, Michael Brown discusses three golden rules to protect your savings account from eroding purchasing power

In 2000, the average price of a loaf of white bread was a mere 69 pence. Now that same loaf of bread costs £1.22, according to the Office for National Statistics.

Much of this is owed to inflation which, since the turn of the century, has averaged 2.8% per year, according to the Bank of England.

For many savers this is a worrying statistic. There are thousands of savings products which have failed to match this increase over the years, meaning there are many consumers who have failed to gain from their investment.

Unfortunately, no savings accounts currently come close to beating inflation, however, if you are worried about making insufficient returns, there are steps to take which can help protect your savings account from inflation.

Keep an eye on the competition

In periods of high inflation, pressure increases on the Bank of England to raise interest rates. When base rates increase, banks typically respond by raising the interest on their savings products.

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With the savings market not short on competition, providers will begin to add interest and incentives to their products as they battle for your business. This is when you should consider shopping around for the best deals.

Even a 0.5% difference in interest can make a difference if you are investing a large sum of money, so choose your investment carefully.

To illustrate, investing £20,000 into an account with an annual fixed-rate of 1.50%, you would earn you just over £3,200 after ten years. However, if you invested the same amount of money at a fixed-rate of 2% over the same period you would earn almost £1,200 more.

Therefore, savers should not only shop around the big name banks, but also consider what challenger banks have to offer. Typically, challenger banks offer higher interest rates to entice a new cohort of loyal savers.

Consider fixed-rate bonds

Although the majority of UK savings are tied up in easy access accounts, savers should consider fixed-rate bonds.

While fixed-rate bonds do not have the convenience of easy access to your cash, they do offer high-interest rates when compared to other products on the market. These are your best bets to reducing the effects of inflation.

Even if you require immediate access to some of your funds, it may be worthwhile putting the rest of your money into a fixed-rate bond. Then you can keep the rest of your money in an account with a notice period suitable for your needs.

Consider ISAs

Unlike some of the interest you may earn from a savings account, ISAs are tax-free. Therefore, it may be worth considering spreading some of your money into an ISA, not only to diversify your portfolio, but to minimise your taxable income.

As mentioned in last month’s piece, your ISA allowance is only £20,000 per year. Therefore, depending on the amount of money you wish to save, investors should choose their fixed-rate and notice period carefully.

When looking for the best ISA and savings rates available to you, visit to compare the best options available to you.

Michael Brown is an online reporter at, the money comparison experts, specialising in personal finance.