loveMONEY election manifesto: introduce an NS&I savings account that beats inflation

Here’s a simple step the new Government could take to help us save without the value of our cash being eroded.

The UK General Election is just weeks away and the main parties have revealed their key manifesto pledges ­– but the one thing they’re all missing is a plan to help savers.

The Conservatives, Labour and the Liberal Democrats have made bold claims about building homes and how to tackle the cost of the State Pension, but none have hit on a solution to stop inflation eroding our cash.

If you ask us, the incoming Government should launch an inflation-linked NS&I savings bond. Here’s why it’s important and how it might work.

Make sure your savings are earning a half-decent rate

Inflation impacts savings

Inflation measures how the prices of everyday goods are changing and the impact that has on the purchasing power of our money.

When inflation is high it means our money will buy less.

So when it comes to the cash we’re saving for the future it’s important to make sure we are keeping pace with rising prices and achieving a return that can match or beat inflation.

Inflation as measured by the Consumer Prices Index (CPI) is currently 2.7%. This means that the purchasing power of money will be 2.7% lower in a year if the rate stays the same.

In other words, a holiday that costs £1,000 now, would cost £1,027 this time next year. But if you put that £1,000 away in a savings account paying 1%, you would have just £1,010 to pay for it after 12 months – leaving you £17 short.

Inflation impacts savings as it means your money has less purchasing power in real terms so has effectively shrunk and for those that have used up their Personal Savings Allowance, tax will also impact real returns.

See our guide: how to calculate your real rate of return on investments and savings to check how your savings and investments are doing against inflation and tax.

Savers are being hammered

 Currently no traditional cash savings account can beat inflation – not even the NS&I Investment Guaranteed Growth Bond introduced earlier this year.

This was first announced in November 2016 by Chancellor Phillip Hammond who said it would offer a rate of 2.2%. At the time inflation was low at 0.9%, so it was hailed as a victory for savers.

But fast forward to April 2017, when the deal actually landed and inflation was much higher at 2.3%. Now, with inflation at 2.7%, anyone that had locked cash into the account is actually losing money in real terms

We asked NS&I why the Government went ahead with a three-year rate that was below inflation, but it defended the move.

A spokesperson said: “This is a market-leading product. The rate offered is above the market average of 1.24% for a three-year product and customers also benefit from the NS&I 100% government guarantee.”

But Charlotte Nelson, from financial data website Moneyfacts, doesn’t think it stacks up either.

She commented: “Savers have been suffering for a long time and inflation is just another hammer blow. 

The three-year NS&I bond was hailed as an account to help savers get a decent return. But it seemed doomed from the start and now with inflation eroding savers interest it leaves many questioning the account all together.”

Savers that are looking to beat inflation could turn to investing. This tends to deliver better returns than cash savings over time, but your money is at risk and it’s something you need to stick with over the long term to see the best returns.

Compare savings accounts on loveMONEY

What the Government could do

With inflation climbing at a steady rate since November 2016, high inflation looks to be making a return. In fact the National Institute of Economic & Social Research recently warned inflation could hit 3.4% later this year.

So the new Government really needs to address the issue of savers’ money shrinking in real terms, before it gets any worse.

In the past savers have been offered index-linked savings bonds through NS&I, which follow the Retail Prices Index (RPI) measure of inflation plus 0.5%.

The last time these went on sale was on 12 May 2011, when CPI inflation was 4.5% and RPI stood at 5.2%. In total 445,000 savers rushed to snap the deals up before they were withdrawn on 7 September 2011.

Unfortunately, these deals are no longer available for new investors, but existing holders can reinvest maturing bonds which means their cash is safeguarded.

But why not bring them back to give struggling savers that need a risk-free home for their cash a lifeline?

Give savers a better deal

The simple fact of the matter is the NS&I Investment Guaranteed Growth Bond isn’t going to be able to deliver if inflation continues to rise.

So the incoming Government should scrap it and re-introduce index-linked savings to keep our pots from shrinking.

NS&I sets rates to balance the interests of three groups: customers, taxpayers and the wider financial services sector. At the moment it seems to me that customers are getting a really raw deal.

Nelson agrees: “The Government needs to take a look at how savers are treated and offer them an account keeping pace with the rising inflation levels.”

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