By Paul Dickson, of Armstrong Watson

Last updated at 22:36, Friday, 05 September 2008

Inflation has been getting a lot of press lately – so should you be worried and what can you do?

• Visit the Armstrong Watson website

Take note: The global economy is now at work, and the rising price of oil, food and other basic commodities mean the UK hasn’t really got control over its own inflation

In recent years, the so-called ‘Goldilocks’ economy of not-too-hot, not-too-cold has been something we’ve got used to. But the global economy is now at work, and the rising price of oil, food and other commodities mean the UK hasn’t really got control over its own inflation.

The Office of National Statistics reports that the rate of inflation (RPI) is now at 5 per cent – more than twice the target of 2 per cent set by the Monetary Policy Committee’s (MPC) target. Developed economies tend to do well when inflation is positive but controlled.

When inflation gets out of control there are few winners. Only those who have borrowed significantly will prosper, assuming they can afford the interest on their debt, as inflation will erode the ‘real’ value of their debt. What about those of us with savings and investments in cash?

With the RPI at 5 per cent it’s hard to make money after inflation and tax. Lower rate and non-tax-payers have the best chance of profiting from cash deposits if they keep their eyes on the best buy tables.

A rate of 6.25 per cent (5 per cent after tax) will maintain the buying power of their capital, but a higher rate tax payer would need 8.33 per cent to fight off inflation.

According to moneyfacts.co.uk, Bradford & Bingley has an internet account paying 6.51 per cent – a long way off what’s needed for your savings to stand still.

If you need these cash savings for income then you’re in an even more difficult position; if you spend the interest then your capital falls in real terms.

That means in future years, your income will be worth less too. So what can you do?

One option is to look outside cash investments and invest longer term in other asset classes to give you a chance of beating inflation. This raises the question of another element of risk – capital risk as the value of your investments can fall as well as rise.

Some would argue now is a good time to be investing in certain areas for the medium to longer term, with many markets at historically lower levels.

If you want to remain in cash then you should make the most of tax–free savings allowances. HSBC’s cash ISA will pay 6.25 per cent, though no more than £3,600 can be invested each year. For larger amounts you can tie up for a number of years, off-shore bonds allow you to take 5 per cent of the capital and defer tax for up to 20 years. For some investors and especially higher rate tax payers this route can be extremely attractive.

For those with cash savings and a mortgage you should consider an ‘offset mortgage’, balancing savings against mortgage debt. This has a net effect similar to receiving interest on your savings but without paying tax on it. With a £100,000 mortgage and £40,000 in the bank you’d only pay interest on £60,000 of your debt, and avoid paying tax on the interest on your savings.

• For advice on beating inflation, call freephone 0800 195 2161 or email moneymatters@ armstrongwatson.co.uk

First published at 05:36, Friday, 05 September 2008
Published by http://www.cumberlandnews.co.uk