Insulating yourself from inflation

Inflation isn’t just bad when you realise that your weekly shop is costing more and more. It’s also terrible if you’re trying to put money away for the future. We’ll explain how you can try to protect your savings from the impact of inflation.

Inflation means the price of goods like your weekly shop and services and your electricity bill increase, so the money you’re earning doesn’t go as far. This also means that your savings will have less spending power in future. 

Thinking about inflation is important when you have long-term goals, like saving for retirement. If the money for your pension doesn’t keep up with inflation, then you could be looking at lower standard of living when you finish work.

The level of inflation is worked out monthly by the government using two figures. The Consumer Price Index (CPI) and the Retail Price Index (RPI). The difference is the RPI also includes housing costs, so it’s a higher figure. 

If the annual rate of interest you’re earning in a savings account is lower than these inflation figures, your money won't grow fast enough to keep up with price increases – so you’re getting negative real returns. You also have to consider any UK income tax you may have to pay on your savings which will eat into that interest even more. 

Increasing rates of inflation can be a big problem if you’ve chosen fixed-rate savings accounts like bonds. If inflation increases while your money is locked in to a three-year or five-year bond, then you won’t be able to move it to an account with a higher rates of interest. 

To beat inflation, you’ll need to find places to invest your money that offer the potential for higher returns. But remember, bigger returns often come with higher risk. The value of investments can fall as well as rise, and you may get back less than you’ve invested. 

Pensions

Pensions are designed to deliver returns over the long term and support you in retirement. To encourage people to save for retirement, the government gives tax relief when you pay into one, up to certain limits. You won't be able to access any pension savings until age 55 (57 from 2028). 

Your first choice should be a workplace pension, if you can get one, as your employer will top up your contributions. If that’s not available, you could start your own pension, like a Self-Invested Personal Pension (SIPP), where you have more control over your investments. At Aviva, we offer an award-winning SIPP. 

Stock and shares

Investing in stocks and shares has historically been a good way to beat inflation over a long period of time. You can choose to spread your investment across lots of different sectors and countries to try and increase your gains over time. Stocks and shares are often bundled together into investment funds, to make investing in them a little easier. 

Using an ISA can also help boost your gains, as any money you make will be free from UK Income Tax or Capital Gains Tax. In the tax year 2024/2025 you can invest up to £20,000 and at Aviva, we have a Stocks & Shares ISA, which you can manage easily online. 

Property

Property can have inflation-busting benefits. When you own an investment property you’ll benefit from any increase in its value, but may also receive monthly rental income. 

As with any investment though, property can go through times where prices drop. In 2023, inflation was high in the UK and average property prices dipped slightly over the year . So, the value of property was falling faster when you take inflation into account.  

Commodities

In times of high inflation, the value of commodities like gold and other precious metals, raw materials like steel and farm produce like corn, can increase. By investing in commodities themselves or choosing funds or Exchange Traded Funds (which trade during the day rather than having a fixed price after the market closes) that focus on commodities, you can aim for higher returns. 

It can be hard to find truly inflation-proof investments, but government bonds, also called index-linked gilts, are designed to provide some protection from rising prices. 

When you buy an index-linked gilt, you lend money to the UK government. They promise to pay you back the money you lent plus an extra amount to keep up with inflation – based on RPI. You’ll also get regular interest payments. The total will be paid whenever the bond matures, which can be in several years. 

Companies that produce commodities like energy and steel may profit from higher prices and increase their share price. Others that make consumer goods may be hit by higher production costs and a drop in sales, as customers have less money to spend. 

Governments can also increase interest rates in response to inflation to try and slow price rises. This can raise the cost of any debt businesses have, which can impact their financial results and cause a drop in their share price. 

That’s why it’s important to regularly review the performance of shares or funds that make up your investments. By changing them, you could improve your returns. 

If you’re interested in investing to beat inflation, it could be worth chatting to a financial adviser. They’ll be able to put together a plan to suit your long-term goals. You can find one at Unbiased – there may be a charge for their advice.