Index-linked savings on a roll... for now

Share this article

In his regular column for the Lancashire Evening Post Jeremt Gates looks at what to do with your money if inflation returned to the UK economy.

If you believe our economy sits on a powder keg of inflation – and some fear its return might be the only salvation for Britain if Government plans to borrow 700bn are carried through – there are sound arguments for holding savings which guarantee an index-linked return.

If they ponder Chancellor Alistair Darling's words carefully, savers might want an alternative to banks or building societies for part of their savings.

In any case, the 3%-plus fixed-rate returns, now on offer from these institutions over two or three years, could look mean if inflation takes off.

It was therefore not entirely coincidental that National Savings & Investments (NS&I) offered two new issues of Inflation-Beating Savings certificates this week.

Also called Index-linked certificates, they enable savers to invest a maximum 15,000 per issue in three-year (19th issue) or five-year (46th issue) certificates, with a minimum investment of 100.

Dax Harkins, NS&I senior savings strategist says they usually make a new issue of Index-linked certificates when they change the rate.

"In this instance, the rate stays the same – Retail Prices Index plus 1% – if held for the full term, but investors wanted a new issue to allow them to put more money in."

As NS&I certificates are tax free, the equivalent rate is index-linking plus 1.25% for basic rate taxpayers, and index-linking plus 1.67% for higher rate taxpayers.

On each anniversary, interest and index-linking are added to the certificate

The last issue was in June 2008, which effectively means that NS&I offers an opportunity to salt away up to 15,000 per person per year, or 30,000 per couple, with returns free of both income tax and capital gains tax (CGT), like ISAs.

Many savers clearly value 100% security for their cash.

Index-linked Savings Certificates were launched by NS&I in 1975, and 600,000 investors hold 16bn in them against 39bn in Premium Bonds, which are more heavily promoted.

With Premium Bond prizes falling to just 1%, new 25 prizes have been introduced to ensure Bond holders win nearly one million prizes per month.

With 39bn Premium Bonds in circulation, the odds on any single bond winning are 36,000-1.

As Premium Bonds lose some appeal, the threat of inflation makes Index-linked certificates more attractive.

If RPI goes negative – it currently stands at minus 0.4% – they still guarantee the annual 1% bonus on investments held to the end of their term.

In fact, this is the first time a continuous period of deflation has been experienced since NS&I launched the concept of Index-linked certificates.

With personal tax levels certain to rise after the next General Election, because our economy is in such a mess, there is a strong case for using NS&I products to hold more savings outside the tax net.

However, savers should remember that Inflation Beating Savings pay no interest at all on withdrawals after one year, with returns thereafter weighted to favour those who remain for the full term.

The experts clearly see their advantages.

"It won't have you jumping up and down with excitement, but this product already pays a better return than many instant access savings accounts, and returns could look very good if inflation kicks in seriously, maybe 18 months from now," Mark Dampier at Hargreaves Lansdown says.

"Over three to five years, they are not a bad bet!"

Kevin Mountford, savings expert at, says NS&I products should be in any balanced savings portfolio.

"With index-linking, you have the prospect of a fixed return, as opposed to accounts which are market-leading one moment and stragglers a few months later.

"Here there is the prospect of a definite return, over and above the cost of living."

Andrew Hagger at says for savers purely concerned with inflation, it's a good home for your money – but he is not sure he would tie up money for that long at present.

"Consider the West Bromwich BS E-Bond, paying 4.3% before tax on a one-year bond (minimum 5,000), or perhaps ICICI Bank's Instant Access paying 2.45% on a minimum 1, until the trend on rates becomes clearer."

Have you signed up to the new free lepbusiness newsletter? Click here to subscribe.