Looking beyond deposit accounts to beat inflation

Investment choices are very limited at the lower end of the market thanks to increasing inflation rates. This is illustrated by a Family Money reader's recent search for a longterm investment that would complement a small pension plan but still give him access to the funds if needed.

Our self-employed reader said: "The logic of a pension plan is that it is a good investment for people who have high relative earnings in middle life and them suddenly earn nothing at 65, or whenever they retire."

He is on a low income and does not plan to retire from his vocational profession. "For those of us whose earnings are not particularly high but who plan to work as long as we can, a pension plan seems perhaps not an ideal way of making provision for the years ahead," he said.

Mr Dermot O'Brien, of National Deposit Brokers, said if our reader wants to save regularly and has an investment horizon of seven years or more, he should look beyond deposit accounts which are not keeping pace with inflation.

Realistically, his only option is a Personal Investment Plan (PIP), which is a unit-linked fund provided by most of the life assurers, he said. PIPs are usually mentioned along with personal equity plans (PEPs). Both products allow people to save on a regular basis but also provide them with exposure to equity investments. PEPs are a special investment policy that is exclusively equity-based, while PIPs may be a mix of asset classes.

The tax treatment of these products differs. PEPs have same tax treatment as Special Savings Accounts (SSA) - 20 per cent - said Mr O'Brien.

Standard PIPs profits are charged at 22 per cent within the fund. The term PIP is generally used to describe products that are open to regular savers as opposed to lump sum investors.

"PIPs provide reasonably cheap access to managed funds and, in general, customers may contribute from as little as £50 a month," said Mr O'Brien.

The industry is currently projecting return on these investment of between 6 to 8 per cent a year, he said. As usual, past performance is no guarantee of future returns.

Factor in an inflation rate of 5 to 6 per cent and deduct taxes and the returns are still very small. However, there are very few options for those making small regular investments and beating inflation is better than losing out to it.

In most cases, PIPs do not charge penalties for withdrawals, although it is important to check the small print. The charging structure is a 5 per cent bid/offer spread on contributions and a 1.5 per cent a year management charge. The same proportional charge applies whether they contribute £50 or £500 a month.

Investors should choose a particular PIP product depending on their risk profile. "In particular, I'd be recommending PIPs from Irish Life, Eagle Star and New Ireland because the charging structure is the same for all or these," said Mr O'Brien. Irish Life also offers an index type fund and a consensus type fund which others do not.

It is important that consumers use PIPs appropriately, said Mr O'Brien. They must be willing to invest for suitable period of time - say seven to 10 years - and must accept the risk associated with equity-based investment.