How to protect your UK savings
from inflation

The rising cost of living may have forced you to reign in your spending over recent months, but have you considered the impact of inflation on your savings? With inflation rising to 5.4% in the 12 months to December 2021*, it might be time to review your savings and investment strategy.

In this article, we look at how inflation works, what it means for you and three ways you may be able to protect your savings from inflation in the UK.

What is inflation?

Inflation is a measure of the rate at which the price of goods and services increases over a set period. So, if a £1 tin of soup rises by 3p, the rate of soup inflation is 3%. Rising inflation results in a reduction in the purchasing power of money. In other words, you’ll get fewer goods and services for your pounds and pence. 

You only have to look back over the last few decades to see the effects of inflation. For example, in 1970 £1 was able to buy 10 loaves of bread. Fast-forward to 1980 and this had fallen to three loaves. By 2020, £1 could buy you just one loaf of bread. This is the result of inflation and the fall in purchasing power over time.

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The Bank of England (BofE) aims to keep inflation at 2%. However, the effects of the Covid-19 pandemic and the global surge in energy prices means UK inflation is now well above this target. In December 2021, UK inflation climbed to 5.4% – the highest rate in 10 years. 


What’s more, the Bank of England, has predicted that UK inflation could peak at around 6% in 2022. An increase in inflation can have an  effect on interest rates, and there has been speculation that the BofE may be forced to further raise UK interest rates in the months ahead.

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How does inflation affect your finances?

With inflation expected to rise further, you may be wondering what all of this means for your finances. Let’s look at this in a little more detail.

You may already be feeling the impact of inflation on your general living expenses. Costs for items such as DIY materials and savoury snacks have risen substantially over the past year. This, coupled with high energy and fuel costs, means you may have less money left over from your wages at the end of the month. And if your salary is rising by less than the rate of inflation, you will see a fall in the ‘real’ value of your pay. Those people already living on a small income are likely to feel the pinch more acutely. 

As well as affecting everyday spending, rising inflation can also impact your savings. Say, for example, you put £1,000 into a savings account with an interest rate of 1%. One year later you will have an extra £10 in the bank. While you might have more money, if the inflation rate is higher than 1%, your purchasing power will be less.

If your aim is to generate a good return on your savings in real terms, you may want to look at ways you can try to ‘beat inflation’ (see below).

How to protect savings from inflation in the UK

While your easy access savings account gives you the flexibility to withdraw and deposit money, it’s worth remembering that it’s not the most profitable option for long-term savings. This is because the interest offered is usually far lower than the rate of inflation.

That being said, easy access accounts may still have a place in your savings strategy. They’re particularly useful if there’s a chance you may need to access the money quickly or you want to work towards short-term savings goals

If, however, you want to protect longer-term savings from inflation, you may need to take some risks. If you’re happy to do this, investing in the stock market could be the best option.

Here are three ways you can protect your UK savings from inflation:


1. Consider equity investments

If you want to beat inflation or simply diversify your savings portfolio, equity investments may be a good choice. Equity investments mean you’re investing money into a company by purchasing its shares, which are small pieces of the company. Shares are also referred to as stocks. If you own stocks, you’re entitled to a portion of the profits and assets the company makes. There are various types of equity investments available.

Stocks typically beat inflation in the long-term, because companies can increase their share price to keep up with increasing costs brought about by inflation. For example, if wages and production costs rise because of inflation, a company might pass these costs to their consumers by raising their share prices, and the cost of their goods or services. 

While equities have historically proved to be one of the most effective ways to beat inflation, there is a high degree of risk involved. The unpredictability of the stock market means you could stand to lose all, or part of, the value of your investment.

2. Research other investment vehicles

Equity investments aren’t the only vehicles that can protect savings from UK inflation. Index-linked bonds, also known as gilts, have also proved profitable for many investors. Offered by the government, they make coupon payments based on the retail price index (RPI), which measures inflation. A higher inflation rate results in a higher coupon payment. 

Given the current economic climate, demand for index-linked bonds is extremely high and they are trading at premium rates. To determine whether this is the best option for you, we recommend speaking to a financial adviser. They can help you compare a range of investment vehicles to create a solid inflation-beating portfolio.

3. Take advantage of tax breaks

Maximising tax-efficiency is crucial if you want to make the most of your savings and investments. Whatever investment route you choose, it makes sense to use any tax breaks while they’re available. 

Tax-free savings accounts such as ISAs are a popular and tax-efficient way to invest money over the long term. You can save up to £20,000 in an ISA every tax year without having to pay tax on any interest earned. 


There are currently four types of ISA available:

You can open more than one type of account, but the maximum investment allowance applies to you as an individual, not to each account you open. 

Investing in a pension scheme is also a great way to minimise tax as the government effectively tops up your contributions in the form of tax relief. The amount of tax relief you receive will depend on your taxable income – in some cases it’s worth up to 45%. 

The maximum amount you can pay into your pension pot and receive tax relief for is currently £40,000 (the annual allowance), while the lifetime allowance is set at £1,073,100 (2021/22). 

Protect your savings with Raisin UK

At Raisin UK, our marketplace is home to savings accounts with high interest rates from a range of partner banks. 

Our fixed rate bonds tend to offer the most competitive rates of all account types, making them an ideal choice for long-term savings goals. However, if you prefer to have a degree of flexibility, notice accounts may be a better option. They require you to give a short notice period to withdraw money, typically between 30 and 90 days, but offer more competitive rates of interest than easy access savings accounts. 

To get started, simply register for a Raisin UK Account today.

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