Don’t confuse these index-linked certificates
The Post Office has launched new three and five year inflation linked bonds, not to be confused with the Index-linked Savings Certificates from National Savings & Investments.
It is potentially quite easy to confuse the two, as National Savings products are often promoted by the Post Office. You can even find links to NS&I savings accounts on the Post Office website.
The new Post Office Inflation Linked Bond is the second issue and is on sale until 2nd September 2011.
They offer a three or five year term, with returns over that time measured as RPI inflation plus 0.5% or 1.5% gross respectively.
This rate of return is based on the annual Retail Prices Index (RPI) as measured in August each year, with an additional fixed return of 1.5% or 0.5% gross per year. The minimum return in any year, if RPI is negative, is the fixed return for that term product.
The fixed term for these products starts on 10th October 2011.
Inflation Linked Bonds from the Post Office differ from Index Linked Certificates from National Savings.
Returns from the Post Office Bonds are subject to income tax whilst the National Savings Certificates are tax-free.
NS&I products are backed by HM Treasury, which makes them guaranteed. Post Office savings accounts are provided by Bank of Ireland UK, so the level of protection afforded to savers is based on the Financial Services Compensation Scheme (FSCS) limits.
The current FSCS compensation limit for savers is £85,000 per person per firm. With the maximum deposit limit on the new Post Office Index Linked Bonds at £1,000,000, there is clearly a risk that some savers will exceed this protection limit.
The N&SI Certificates can be withdrawn early, with no index-linking or interest paid if they are closed in the first year.
The Post Office Inflation Linked Bonds can also be closed early, but only in ‘exceptional’ circumstances. An early withdrawal charge would apply so savers could get back less than their original investment if they closed their account early.
These are different savings accounts with the potential for confusion. If you decide to invest in an Index-Linked Certificate or Bond, make sure you understand who is providing the account and how the terms operate.
Photo credit: Flickr/Ingy The Wingy