With price inflation continuing to remain stubbornly high and above the government target, the Post Office has timed the launch of their new Inflation Linked Bond very well.
The product, which goes on sale on 22nd February 2011, is a five year fixed term bond offering a return of inflation plus 1.5% gross a year.
It is using the Retail Prices Index (RPI) measure of price inflation, which currently stands at 5.1% for the year to January 2011.
At face value, this looks like a very attractive product.
Savers are generally worried about price inflation at the moment, so a savings account which offers an inflation-beating return is likely to be popular. Linking the return to RPI rather than CPI, which tends to be lower, will also be popular.
It is important to remember a few key things about this product before committing your savings.
Firstly, it has a five year fixed term. In practice this means tying up your savings for the five year period and a lot can change during that time.
Think back five years ago to 2006 when the Winter Olympics were held in Turin and the first case of bird flu was detected in a swan in Britain. It all feels like a long time ago and a lot has changed in economic terms during that time.
Secondly, inflation might be running above target today, but there is every chance that it will start to fall once transient and imported inflation is removed from the equation. The return from this Inflation Linked Bond might look attractive today, but what about this time next year if inflation has fallen below target and interest rates have gone up?
Finally, like all Post Office savings products, their new Inflation Linked Bond is provided by Bank of Ireland (UK). As we wrote in November, the Bank of Ireland created new subsidiary called Bank of Ireland (UK) plc on 1st November 2010 which is authorised and regulated by the Financial Services Authority (FSA).
This means that savers with Post Office accounts now receive protection under the terms of the UK Financial Services Compensation Scheme (FSCS), raReview: The new Post Office Inflation Linked Bondther than the equivalent Irish compensation scheme and any Irish government guarantees.
UK savers would be well advised to limit their total exposure to Post Office savings through Bank of Ireland (UK) to the maximum deposit compensation limit under this scheme, which is £85,000 per person.
Looking at the rest of the market, only Birmingham Midshires appears to be offering a similar concept. They offer a Five Year Inflation Rate Bond which offers RPI + 0.5% gross.
Unlike the Post Office product, Birmingham Midshires pays away interest each anniversary whereas with the Post Office Inflation Linked Bond the saver must wait until the end of the five year term to receive their interest.
The Birmingham Midshires Inflation Rate Bond uses the RPI figure calculated to January whilst the Post Office Inflation Linked Bond uses the April RPI figure. This could make all of the difference when it comes to comparing the final return from the two products at the end of the term.
The Post Office Inflation Linked Bond is only going to be available for a limited time, between 22nd February 2011 to 27th April 2011.
We suspect that the hype surrounding this product will be substantial, with some commentators washing over the important issues identified above, so this product is likely to become quickly oversubscribed and subsequently withdrawn before the 27th April deadline.
Remember to also consider how any financial product fits with your own financial planning, goals and objectives. What looks good at face value may or may not suit your own needs.
