Inflation proof your cash

The Retail Price Index is rising. A key way to stay ahead of inflation is by maximizing the return on your cash.

Here are a few tips:

Tip 1: Change your current account

Make sure you are earning the best rate of interest on the cash kept in your current account. There is a wide variation in rates and it is well worth shopping around.

Tip 2: Ensure savings are getting the highest rate

It is well worth checking to see if your current savings rate is still competitive. If you need regular access to your savings, however you will have to be willing to accept a lower rate of interest – there are, however, some very good deals out there, so it is worth shopping around.

Tip 3: Take advantage of cash Isas

Cash individual savings accounts (Isa) work like any other standard deposit account, except that the interest is tax-free. It is possible to invest up to £3,600 a year in a cash Isa. If you have money in an Isa that is no longer paying a competitive rate of interest, you can transfer it to another account without losing the tax break.

Tip 4: Offset savings

More than likely, you are paying a higher rate of interest on your mortgage than you are getting on your savings. This means that an offset mortgage may be worth considering, particularly if you are a higher-rate taxpayer.

Offset mortgages work by setting savings against borrowing. In effect, you do not get paid interest on your savings, but in return monthly interest payments on your mortgage loan are reduced.

For example, if you had a £100,000 mortgage and £30,000 in savings, you would only pay interest on £70,000 of the loan. Your monthly payments, however, would be based on the full £100,000 loan meaning you overpay on your mortgage each month, and clear your debt more quickly. And because no interest is earned on savings, there is no income tax to pay. This is why offsetting can be particularly beneficial for those in the top tax band.

It should be noted, however, that interest rates on offset mortgages are often slightly higher than those on standard home loans, so offsetting may not be the best option - it will depend on the amount you have in savings.

The main offset providers include Newcastle and Yorkshire building societies, Woolwich, Intelligent Finance, and First Direct.

Tip 5: Purchase NS&I index-linked savings certificates

You are guaranteed to stay ahead of rises in inflation by investing in index-linked savings certificates available from National Savings & Investments (NS&I). Three and five-year plans are available that are set at 1% above the retail price index (RPI), with minimum purchases of £100 and maximum purchases of £15,000 per issue.

The three-year certificate, 18th Issue, is paying 1 percentage point above RPI, currently 5.6%. This equates to a savings rate of 7% for a basic-rate taxpayer, and 9.3% for a taxpayer in the top band.

Tip 6: Review your interest

If you have a credit card, or a loan, and the interest that you are being charged is higher than what you are earning on your savings, focus on repaying your debts first rather than committing more cash to savings.

You should also ensure that you are not paying more credit card interest than necessary. There are some great interest-free balance transfer credit card deals that you may qualify for if you have a good credit rating.

However, if you do choose to put most of your money towards debt repayment, remember to keep some cash aside for unforeseen eventualities.

Tip 7: Try a little gambling

For around £100 you could pick up a NS&I Premium Bond. There are two £1m jackpots every month along with many smaller cash prizes. But, unlike the National Lottery you get to keep your stake money.