National Savings & Investments are reintroducing one of their most popular savings products – Index-linked Savings Certificates.
These products, which are backed by HM Treasury, offer savers protection against price inflation.
The new issue will pay inflation, as measured by the Retail Prices Index (RPI) plus 0.5%. Returns are tax-free.
They are a five year bond with a maximum investment of £15,000.
NS&I Index-linked Savings Certificates were withdrawn from sale in July 2010 due to exceptional levels of demand in an inflationary environment where savers were disappointed by low interest rates.
We expect the level of demand for this new issue of Index-linked Certificates to be very high.
Savers are continuing to suffer from the combination of high inflation and low interest rates, resulting in an erosion of the ‘real’ value of their savings.
However, we urge caution before savers take up this new issue.
Whilst inflation is high and interest rates are low today, this situation is likely to look very different within the next twelve months.
The latest Bank of England inflation report is forecasting a peak in price inflation later this year before it starts falling back.
Savers who commit their money to these new Index-linked bonds could be very disappointed with the total return over a five year period. Early withdrawals from NS&I Index-linked bonds are possible, but without the addition of index-linking or interest if they are surrendered during the first year.
If interest rates go up towards the end of this year or early next year, to bring inflation under control, receiving 0.5% over the rate of RPI inflation could suddenly look less attractive.
We saw one cynical IFA comment on Twitter this morning that the relaunch of NS&I Index-linked bonds means inflation is about to come down. He is probably right.
That said, this new issue of Index-linked Savings Certificates could form part of an overall savings strategy for an investor who is concerned about the impact of price inflation.
