Perfect timing for NSI to re-launch index-linked savings

Jeremy Gates looks at the nation’s money issues and reports on savers stepping up the search for index-linked certificates

ALTHOUGH National Savings Investments (NSI) hardly enjoys a reputation for good timing, its move to relaunch index-linked certificates – withdrawn controversially last summer – couldn’t have come at a better moment.

For with the latest inflation figures showing the Consumer Prices Index (CPI) rising in April from 4% to 4.5%, financial data agency Moneyfacts.co.uk calculates that to avoid losing money on savings, a basic rate (20%) taxpayer needs a savings account paying 5.63% per annum.

The higher rate (40%) taxpayer needs an account paying at least 7.5% to avoid losing money.

Only two standard accounts beat CPI at 4.5%, says Moneyfacts.co.uk – the five-year Fixed Term Cash ISAs from Birmingham Midshires (5%) and Northern Rock Issue 161 (4.5%).

No accounts can help a taxpayer trying to beat the Retail Prices Index (RPI) at 5.2%.

The effect of inflation means £10,000 invested five years ago, allowing for average interest, inflation and tax at 20%, has the spending power of £9,481 today.

Sylvia Waycot, at Moneyfacts.co.uk, says: “After one month’s reprieve, inflation is back on the rise, scuppering hopes of getting meaningful returns on savings for another month.

“CPI is more than double the Government’s 2% target. Every time it rises, spending power decreases, so a hard-earned nest-egg or savings safety net is further eroded.

“Over the last six months, the number of savings accounts beating inflation for basic rate taxpayers is down from 91 to two today, both fixed-rate ISAs.”

It is hardly surprising, therefore, that a rumoured “wall of money” is heading into the new NSI index-linked certificates, which will pay 0.5% above RPI, usually the higher of the two inflation measures used by the Government, if held for the full five-year term.

In year one, therefore, the certificates will pay 5.8%, possibly more, if prices keep rising – and it’s tax-free, like all NSI products.

Danny Cox, at financial advisor Hargreaves Lansdown, says: “This is great for savers. Index-linked certificates are one of the best ways to protect savings from inflation and they are tax-free.

“It’s good that they remain linked to RPI, because I expected a change to a CPI link which would have generally produced lower rates of return.”

Patrick Connolly, at financial advisor AWD Chase de Vere, says: “With inflation-beating tax-free returns that cannot be matched elsewhere, the backing of the UK Government and relatively lenient exit penalties if you wish to access your money, anybody looking to invest should do so fast.

“NSI index-linked savings certificates may not be around for long.”

Kevin Mountford, at finance website moneysupermarket.com, says: “With inflation forecast to remain high for the next two years, this offering looks attractive to anyone keen to protect the value of a savings pot.

“However, it is worth noting that the interest rate, based on RPI, is calculated on an annual, rather than a monthly basis. If inflation tumbles unexpectedly, customers could get stuck with a less than competitive rate.”

Andrew Hagger, at Moneynet.co.uk, says: “The ability to save £15,000 tax-free certainly appeals, especially to higher-rate taxpayers.

“With RPI at 5.2%, plus the 0.5% from NSI, you would need to earn 7.125% gross from a bank or building society account (basic rate taxpayer) or 9.5% (high rate taxpayer) to match this 48th issue NSI rate.

“You can get anywhere close to that at present.”

NSI has another ace up its sleeve: savers can withdraw their money during the five-year investment period, and only in year one is nothing at all added on to cover inflation which has taken place since the account opened.

Although NSI chief executive Jane Platt suggested in a BBC radio interview that this index-linked certificate issue could stick around for a while, savers – who can invest a maximum £15,000 each in this issue – probably haven’t got much time to cash in.

Alternative products for savers which are linked to inflation don’t compare too well.

Birmingham Midshires promises RPI plus 1.5%, before tax.

Hagger calculates that with RPI at 5.2% plus 1.5% on top, the rate is effectively 6.7%, but basic 20% tax cuts this to 5.36%. Higher-rate taxpayers only get 4.02%.

Kent Reliance had an inflation-linked product, too, but it went on May 21.

Serious income-seekers might ponder the six-year income bond from NFU Mutual, promising a guaranteed income of 5%; a £50,000 lump sum guarantees £2,500 each year, in four instalments of £625.

Over the full six years, £50,000 invested generates a total income of £15,000. A £25,000 investment produces £7,500.

NFU Mutual offers enhancements to capital for customers who invest before June 5, or put in more than £150,000. Available until June 24, the bond could close earlier if fully subscribed.

There are more than 300 NFU Mutual branches across the UK, and you can visit any of them to discuss this bond. However, your original investment is not necessarily returned in full.

An initial level of the FTSE 100, the index of London’s leading shares, will be calculated from closing prices between July 6 and August 5, 2011.

Over the following six years, the FTSE 100 can fall by up to 49% from this level and your money in this bond stays intact.

If, however, the FTSE 100 drops by half or more than half of the initial level at any point during the six-year investment period, the amount of capital returned at the end of the term may be less than the original investment.

NFU Mutual spokesman Chris Linpow says: “It’s especially difficult at the moment to find a reliable return on your savings. This new bond provides a guaranteed quarterly income from the investment.

“Income bonds don’t suit every investor but can be very worthwhile for people ready to take risk with capital. This bond is only available on the advice of an NFU Mutual consultant, after full consideration of individual circumstances.”

Among fixed rate bonds, Birmingham Midshires offers 5.05% and AA Savings 5%– both gross, and for five years.

INFORMATION: National Savings Investments (0500 500 000 and www.nsandi.com); NFU Mutual (0800 316 4661 and www.nfumutual.co.uk).

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