Filling the inflation-busting gap

A year on, RPI inflation is 3.6 per cent - not as high as a year ago, but still reason to want to retain your NS&I index-linked certificates, if you are shrewd enough to own some.

If your money doesn't keep pace with inflation, you're losing purchasing power. Inflation is widely expected to rise over the long term so beating it must be your first investment goal. However, citing lack of funding, NS&I has stated that it's unlikely to bring the savings certificates back before April 2013. Plus, other rival inflation-beating savings products (previously on offer from the Post Office and BM Savings) that stepped in to fill the gap left by NS&I's exit have also been withdrawn. This means that, for one of the few times in 30 years, investors who want to guarantee the purchasing power of their money have nowhere to turn.

So what are the alternatives? A four or five-year savings account (you can get between 4 per cent and 4.5 per cent interest) just about beats today's inflation level if you are a basic-rate taxpayer, but there are no guarantees that this will continue to be a winner if inflation rises. Higher-rate taxpayers won't be able to make their cash savings keep pace with inflation at all, with 4.5 per cent becoming 2.7 per cent after 40 per cent tax. However, BM Savings, Halifax and Santander all offer cash Isas on rates above 4 per cent.

Equities are the high-risk solution, but don't work in the short term. The FTSE 100 is down 7.87 per cent over the past year, while the retail price index (RPI) inflation is at 3.6 per cent. So a fund performing better than the FTSE 100 benchmark is not necessarily going to make end investors any money in real terms.

Investments that consistently raise their dividends are worth looking at. However, dividend rises don't always manage to keep pace with inflation - last week we looked at how some investment trust dividend heroes (with long records of raising dividends consistently over many years) are not as heroic as they appear.

Andy Creak, director at financial website Rplan, says: "With RPI at sustained high levels, it has become increasingly important for investors to select investments that will give real-term returns. RPI is a key performance indicator when looking at investments. If an investor gets less return from his or her funds than RPI, they are losing money in real terms."

Looking at more than 2,400 open-ended investment funds, Rplan found that just 41 per cent can claim to have beaten their benchmark over the past year - a terrible performance record. However, the vast majority of funds that did manage to beat their benchmark failed to better RPI, with just 11 per cent of all funds beating RPI.

If you want to beat inflation, one suggestion is the Newton Real Return fund, which aims to preserve capital in all conditions. We tipped it in March 2012 (A top performer that's low risk). When markets plummeted more than 30 per cent in 2008, for example, Newton Real Return made a positive return of nearly 4 per cent, and it has made positive returns in four out of the past five calendar years, the exception being a slight negative return last year - not a perfect solution, but you're not going to find one.

Performance of Newton Real Return