You can still beat inflation

National Savings has withdrawn its hugely popular index-linked bonds. Where should savers go now?

Sadly National Savings withdrew its index-linked bonds from the market this week. This is a real shame because these were excellent products that enabled savers to keep up with inflation.

It could be a long time before National Savings launches another index-linked product, so if you’re looking for ways to protect your savings against inflation, are there any alternatives out there?

Social lending

I think the best place to start is with some of the new social lending sites. These are sites that enable you to lend your savings to borrowers via the web. If you think about it, these sites aren’t really that different from traditional building societies.

If you put your savings in a building society, the society will normally lend your cash to a homeowner with a mortgage. So the building society is really just a middleman. It’s the same with a social lending website. You place your savings with the website; the money is then lent to a number of borrowers; and you receive interest on your savings.

The best known social lending website is Zopa. Over the last 12 months, savers with Zopa have been paid an average rate of 6.8% a year which is well ahead of retail price inflation at 5%. As that's an average rate, obviously some savers will receive more than 6.8%.

Some of the newer social websites claim they can offer a better rate. If you’re willing to tie up your money for three years, you can get as much as 7.7% a year at Ratesetter while Funding Circle highlights a return of 8.3% before fees and bad debts.

Of course, you will have to pay tax on the interest you receive. But if you’re a basic rate taxpayer, you’ll still be ahead of inflation once you’ve paid your tax.

Bonds

Social lending websites aren’t for everyone. Many folk will always fret about borrowers defaulting. But if you don’t want to go down the social lending route, there are other options out there.

If you buy a three-year savings bond from the Post Office, you’ll get interest equivalent to the rise in retail inflation plus 0.5% each year. You can get inflation plus 1.5% if you go for the Post Office’s five-year bond.

However, if you fancy either of these products, don’t hang around. The Post Office will withdraw these bonds on Friday, September 10th. Also don’t forget that you’ll have to pay tax on your interest.

You might also like Cambridge Building Society’s Inflation Linked Bond. It’s a 5-year bond that pays you 1% interest each year plus inflation. The nice thing about this bond is that you’ll still receive 1% interest if inflation goes below 1% or if prices actually start to fall. Given the rotten state of the economy, you can’t rule out that scenario.

Easy access

Many people don’t want to tie up their cash for long periods, so easy access accounts are the best option for these people. Unfortunately there are no easy access accounts out there that match inflation right now, but it’s still essential that you shop around to get the best deal possible.

The best easy access account is West Bromwich Building Society’s WeBSave Easy Access 3 account which pays 3.17% a year. The runner-up is Nationwide’s MySave Online Plus Issue 4 which pays 3.12%.

So there you have it. It is still possible to beat inflation, but you will have to tie up your cash for three years or more. And don’t forget that you’ll have to pay tax on your interest with most accounts.

Let’s just hope that National Savings launches another index-linked bond next year. If that happens, don’t hang around. Stick your money in there as soon as possible or you’ll be kicking yourself a few months later when National Savings once again disappears from the inflation-beating part of the market.

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