Savers unaware of real effects of inflation and tax

British savers still suffer from a lack of knowledge about the effects of inflation and tax on their savings when choosing the right nest egg for their money, despite wide coverage of the credit crunch and its implications, according to research from NS&I (National Savings and Investments), the government-backed savings and investments organisation.

Almost a third (31%) of people said that although they know what inflation is they don't understand how it affects their savings while almost one in ten (9%) said they don't know what inflation is at all. More than a quarter (28%) of people also had no idea how tax affects their savings.

John Prout, NS&I's Sales Director said, "It is concerning that many people don't understand what inflation is, or how it might affect decisions about saving or spending money. Inflation means that prices increase over time, so £100 today will buy you a little bit less in a year's time. It can be caused by increases in salaries, increased demand for items or a decrease in supply which all push prices up."

"People are more likely to think about how inflation affects the price of their shopping basket, but not how it affects the value of their savings. The RPI is one of the measures of inflation and with it averaging 3.98% last year if we don't put our savings in a tax free account matching or a non tax free account beating this rate then our money will be worth less in the future."

"It appears that an understanding of the impact of inflation and tax on savings increases as we get older. The younger generations, who have grown up in a time when the economy has seen low levels of inflation need to also be aware of the effect of inflation on our savings as well as our outgoings."

People can keep up to date on the level of inflation by accessing the UK Statistics Authority data directly, from statistics.gov.uk.

Interest in inflation-beating savings products: Index-linked Savings Certificates

In order to protect their savings against inflation people are looking to inflation-beating products such as NS&I's Inflation-Beating Savings (also known as Index-linked Savings Certificates), suggesting a growing awareness of the effect of inflation on savings.

The Certificates are the only form of savings on the retail market that offer a 100% safe, tax-free home and a guaranteed inflation-beating return.

How do Inflation-Beating Savings work?

Index-linked Savings Certificates increase in value each year in line with inflation as measured by the Retail Prices Index - plus guaranteed fixed rates of interest, for 3 or 5 years. These fixed rates increase each year, so to get the best return overall customers should keep their certificates for the full term. This means the returns outstrip inflation and, as nothing is taken away in tax, the spending power of the investment is increased by the end of the term. Customers can cash in their certificates at any time but need to hold them for at least a year to benefit from index-linking and extra interest.

Index-linked Savings Certificates were introduced on 2 June 1975 to protect pensioners' savings against inflation when inflation was at an all time high and over 20%. Originally they were only available to 60+ and so were known as 'Granny Bonds'. Now anyone aged seven or over can invest from £100 up to £15,000 per Issue (a new issue becomes available each time NS&I changes the interest rate on Savings Certificates), and they may be bought for children under seven.

Saving tax-free

Because Index-linked Savings Certificates offer a tax-free return that beats inflation, it makes them particularly attractive for higher and basic rate taxpayers.