New bond guaranteed to beat inflation

Savings and ISAs

Updated on 08 December 2011 | 5 Comments

Santander has launched a new savings bond that is guaranteed to beat inflation.

Since the Post Office withdrew its inflation-linked bonds last month, it’s been really hard for savers to find a way to beat inflation. But I’m delighted to say that Santander has come to the rescue with a bond that guarantees to beat inflation.

If you’re willing to lock your money away for five and a half years, Santander’s Inflation-Linked Savings Bond will give you a return that is equal to the rise in the Retail Prices Index (RPI), plus 5% of that rise.

Let’s say that the RPI was at 200 at the beginning of the period and had risen to 280 five and a half years later. Santander would then give you your money back plus 42%. The RPI would have risen 40% over the period and Santander would give you 105% of that rise.

Given the tough climate that savers have faced in recent years, that’s a very attractive return and I’m sure that this bond will be very popular.

What’s more, this is a deposit account that is protected by the Financial Services Compensation Scheme (FSCS). So if Santander went bust, you’d get all your money back up to a limit of £85,000.

Downsides

That said, this product isn’t perfect. For starters, five and a half years is a long time. Your circumstances may change dramatically over that period. So, for many people, it doesn’t make sense to lock your money away for such a long time.

What’s more, you may do better with a conventional fixed rate bond. That’s because I think there’s a good chance that inflation will fall over the next couple of years. So if you signed up for the Vanquis Bank 3-year High Yield Bond, you’d get a guaranteed return of 4.15% a year for the next three years. That could easily be an inflation-beating return by Christmas 2012.

Another problem is that you can’t put Santander’s bond within an ISA wrapper. So you’ll probably have to pay at least 20% income tax on the interest you receive.

So you may prefer to sign up for the Governor Money 5-year Fixed Rate ISA.  This will pay you 4.5% a year if you’re willing to lock your money away for five years, and you won’t have to pay any tax. I’m a big fan of this ISA but, of course, it doesn’t offer an inflation-matching guarantee.

If you want to put your savings in an ISA wrapper and you want to be certain that you won’t lose out to inflation, you may prefer a new eight-year corporate bond from Tesco.

If you invested £2,000 in this bond now, you’d get a 1% dividend (or coupon) every year. This dividend would increase each year in line with the Retail Price Index (RPI). After eight years, you’d get your original £2,000 back plus any rise in the RPI.

Unfortunately this bond isn’t protected by the Financial Services Compensation Scheme (FSCS). That’s because it’s more like an investment product in some ways rather than a savings account. So in the unlikely event that Tesco went bust, you could lose all your cash.

But overall, the Tesco bond is a pretty attractive offer. Same with Santander. Things are getting a bit better for savers...

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