There's hope in sight for cash-strapped savers keen to keep their money safe from the eroding effects of inflation.
The Post Office has launched a new issue of inflation-linked savings bonds, with the new issue offering a choice of two fixed terms.
The rate of return is based on the annual Retail Price Index (RPI) as measured in January each year, plus a guaranteed fixed return. RPI includes the cost of mortgage interest payments and has historically run at a higher level than the Consumer Price Index (CPI) rate, which could make a real difference to savers.
The three-year bond offers annual RPI inflation rate plus 0.25% gross fixed each year, and paid at maturity. The five-year term offers annual RPI inflation rate plus 1% gross, again fixed each year and paid at maturity.
This ensures that the customers’ savings are always beating the rate of inflation. For example, the annual RPI rate in August 2011 was 5.2%. If this product had been available the year before (and used August RPI readings as the basis for the return) the annual return for the first year would be 6.2% for the five-year term, or 5.45% for the three-year term.
The upsides
The main advantage of the Post Office bonds is that they offer an interest rate you’re unlikely to find anywhere else at the moment.
And the fact that your money is tied in for three or five years means you won’t be tempted to cash in the bonds unless absolutely necessary.
Assuming you have less than £85,000 in savings you’ll be protected too. Since last November, all British savers with the Post Office have had protection for their savings through the Financial Services Compensation Scheme (FSCS). Deposits are covered up to £85,000 per person per institution.
The downsides
The new tranche of bonds are not as generous as the Post Office’s last offering. The previous bonds paid RPI plus 1.5% a year over five years or RPI plus 0.5% over three years. Interest is taxable too which brings down the returns slightly.
The bonds require a one-off lump sum so you can’t add to the figure later. The minimum investment is £500. You need to be sure the bonds are the right option for you as early withdrawals (before the end of the term) will only be permitted in exceptional circumstances and there will be a charge to pay too.
So it is a good idea to make sure you have a safety net of savings, which is more easily accessible such as an easy access account. Check out New market-leading easy access account for a round up of top easy access accounts.
[SPOTLIGHT]Another thing to consider is that the inflation rate on which the return is based is calculated on an annual basis not monthly. This means you won't benefit from any short-term increases to the RPI. And if inflation falls over the year then the bonds won’t pay out as much.
Other inflation-beating products
National Savings & Investments withdrew its index-linked saving certificates last month but there are several other products available for savers looking to beat inflation.
Santander and Yorkshire Building Society both offer inflation-linked products. Santander offers a six-year bond that pays 105% of the increase in RPI. So if RPI stays at 5.2% it would pay 5.45% a year. If inflation falls, it guarantees to pay a minimum of 8% over the whole term, or 1.3% a year.
Yorkshire Building Society offers a six-year product that pays RPI over the term and can be placed inside a tax-free ISA wrapper.
BM Savings also offers inflation rate bonds and inflation rate ISAs, with the three-year version paying RPI plus 0.25% (the same as the Post Office) and the five-year version paying RPI plus 0.5%, 0.5% below the Post Office. The products can be opened by phone or by post up until 19 December and come with a £500 minimum deposit.
How to apply
As with most inflation-linked bonds, it’s best to apply sooner rather than later as the bonds may be withdrawn if oversubscribed. If they’re not oversubscribed then the bonds will be available up until 20 January 2012.
Applications need to be made by post and application packs can be requested by calling 0800 169 7500 or downloaded online at www.postoffice.co.uk/savings.
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