Published: 24 July 2008 Topic: News,Money,Savings

With talk that the UK is on the brink of a recession, the emphasis is on savers to find a good home for their money to maintain their spending power going forward. However, even though savings rates are still highly competitive this may not be as easy as you’d think.

The Retail Price Index rose from 4.3% to 4.6% last month which means that a basic rate taxpayer needs an account paying at least 5.75% on their savings in order to generate a positive real rate of return (the return after tax and inflation). Higher rate taxpayers need to earn 7.66% or more. Yet, around 75% of savings accounts are paying less than 5.75% highlighting the fact that most people will actually be losing money once tax and inflation are factored in.

We’ve come up with some tips to help you beat the inflation trap:

Tip one: Take advantage of Isas

Cash individual savings accounts (Isa) work like any other standard deposit account, the difference being that interest from Isas is tax-free. You can invest up to 3,600 a year in a cash Isa.

The leading Isa rates are available to those willing to lock their money away. Currently the top rate is the Skipton Building Society Fixed Rate Cash Isa at 6.54%, which is fixed until December 14, 2009. However, withdrawals are penalised with 90 days’ loss of interest so you should only invest money you will not need access to in the near future. Northern Rock. Yorkshire Building Society (YBS) and Newcastle Building Society (NBS) all offer rates of 6.30% with varying withdrawal restrictions.

If you want regular access to your cash, Icesave’s Easy Access Isa. is arguably the most competitive deal at 6.10%. It is beaten on rate by both the HSBC Cash e-Isa and the Barclays Tax Haven Isa. both of which offer 6.25%, however, neither accepts transfers and the HSBC deal is only available to those with an HSBC Current Account.

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. However, some consumers have reported problems transferring Isas recently, so if you are thinking of making an Isa transfer read our article ‘Isa nightmare ‘ first. We’ve also published an article explaining, in more detail, how Isas work: ‘Isa rules at a glance ‘.

Tip two: Ensure you’re getting the highest savings rate

A number of the leading savings rates have been pulled in recent days, but there are still some great deals to be had so it’s well worth checking to see if your current savings rate cuts the mustard. Our latest videoblog looks at what’s happening in the savings market at the moment.

If you’re looking to put money away for your child you might wish to consider the Post Office One Year Growth Bond. which can be opened on behalf of children under the age of 16 and offers a rate of 7.05% with minimum investments beginning at 500.

If you want regular access to your savings you’ll have to be willing to accept a lower rate of interest. At the moment the Birmingham Midshires e-saver account issue 2 is the market-leader with a rate of 6.52% on balances above 1. It is closely followed by the Bradford & Bingley Internet Saver 3 at 6.51% with no bonus or withdrawal penalties and a guarantee to match Bank rate until October 31, 2010.

There are several accounts offering 6.50%. The Kaupthing Edge Instant Access Savings Account is one of them with no withdrawal penalties or bonus and a guarantee to be above Bank rate until February 1, 2012. The Capital One Savings Account has the same rate with a one percentage point bonus; the Alliance & Leicester esaver pays no interest during a month in which a withdrawal is made with the exception of July; while the Bank of Scotland Instant Access Savings Account Reward carries its 6.50% rate for 12 months and restricts accountholders to four withdrawals during the first year.

To compare the leading rates, check out our savings comparison tool.

Tip three: offset your savings

Chances are, you’re paying a higher rate of interest on your mortgage than you are receiving on your savings, which could mean that an offset mortgage could be worth considering — particularly if you are a higher-rate taxpayer.

Offsets work by setting your savings against your borrowing, so rather than earning interest on your savings, you pay less interest on your mortgage debt.

For example, if you had a 100,000 mortgage and 25,000 in savings, you would only pay interest on 75,000 of the loan. However, your monthly payments would be based on the full 100,000 meaning you overpay on your mortgage each month and clear your debt more quickly. And because you earn no interest on your savings, there is no income tax to pay which is why offsetting can be particularly beneficial for those in the top tax band.

Do be aware 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 for you — it will depend on the amount you have in savings.

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

You can compare more offset mortgage rates with our offset mortgage comparison tool.

Tip four: NS&I index-linked savings certificates

With index-linked savings certificates available from National Savings & Investments (NS&I) you are guaranteed to beat the rate of inflation as three- and five-year plans are available that are set at 1% above the RPI with minimum purchases of 100 and maximum purchases of 15,000 per issue.

The three-year certificate, 18th Issue, is paying one percentage point above RPI, currently 5.6%. This equates to a savings rate of 7% for a basic-rate taxpayer, and 9.33% for someone in the top band.

Index-linked savings certificates are also a good way of putting money aside for children as they are available to anyone aged seven or over and can even be bought to save money on behalf of a child aged below seven.

Tip five: Pay down debts

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

You should also look to ensure you are not paying more interest than you need. There are some great interest-free balance transfer credit card deals that you may qualify for if you have a good credit rating. The Capital One Balance Transfer Card is interest-free until November 1, 2009, although you will be charged a 3% balance transfer fee. Alternatively, Virgin’s Credit Card. has a 0% offer which runs for 15 months and has a 2.98% balance transfer fee.

However, if you do choose to put most of your money towards your debts remember to keep some cash aside just in case something unforeseen occurs.

Other ideas to consider

These are just some of the ways you can make more of your money to beat inflation. Here are some more quick tips:

• Premium bonds — For around 100 you could pick up a NS&I Premium Bond. There are two 1m jackpots every month along with many other cash prizes.

Have your say: Do you have any other tips on how to beat rising inflation? If so, visit our forum and let us know.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.