Return Of National Savings Inflation-Linked Bonds Welcomed

by Dr. Ros Altmann

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With RPI now over 6%, tax free guarantee of inflation protection hugely welcome

• Better and safer returns for 5 years
• Tax free
• Linked to RPI not CPI
• Up to £15,000 per person
• For 40% taxpayer, if inflation averages more than 3% this beats a 5% fixed rate 5 year bond
• For 50% taxpayer, if inflation averages more than 2.5%, this beats a 5% fixed rate 5-year bond

In March, just before the Budget, I called on the Government to help struggling savers by reintroducing National Savings Inflation linked bonds. The Budget announced that NS&I would be allowed to make a profit of £2bn this year, which has paved the way for the return of these hugely popular certificates.

Today, the announcement has been made that NS&I has reintroduced both index-linked and fixed 5-year savings certificates, with people allowed a maximum of £15,000 in each. Savers will get a tax-free return of 0.5% above rpi inflation over the 5 year life of the certificates.

Ros Altmann, Director General, Saga said: “So, finally, there is a bit of good news for savers, after months of watching their hard-earned money being whittled away by inflation. The latest inflation figures show retail prices rising at over 5% and we expect even worse numbers to come. Inflation is a nightmare for Britain’s older citizens, many of whom are living on fixed incomes, having bought level annuities, or having saved and expected to live on the income from their savings, they now find they are being hit by the rising costs of living.

“The combination of ultra-low interest rates and rising inflation has been a double blow for savers and pensioners. So, I warmly welcomes the return of these National Savings Inflation Linked Savings Certificates, allowing investors some tax-free protection against the ravages of inflation.

“Why were they withdrawn? These certificates were withdrawn last July because they were so popular! Just as inflation was soaring, and investors began to realise that the Bank of England’s assurances of inflation pressures being only ‘temporary’ were false, the Government removed the only proper protection savers for preserving the real value of their hard-earned money. NS&I was having such huge inflows into these bonds, that it was taking too much money away from other savings institutions such as banks and building societies and, therefore, NS&I had to stop selling them. This was great for the banks, but terrible for savers. But, the Budget introduced a measure to allow NS&I to make more profit, which means it can start selling these certificates again. I would expect huge demand from savers desperate for respite from price pressures.”

What are the benefits of these certificates?

• They are safe because they are backed by the Government.
• Prospect of better returns. With retail price inflation already being over 6%, these bonds will protect investors properly. The top 5 year savings accounts are paying only 4% or 5%, which is still below inflation.
• The income is tax-free: The other five year savings accounts in the market are subject to tax. Even a 5% interest will only be worth 2.5% or 3% return to higher rate taxpayers.
• Interest is linked to rpi, not cpi: There has been much furore over the change in inflation linking for pensions and other benefits, with the Government announcing that future uprating will be in line with the consumer prices index (cpi) rather than the retail prices index (rpi). The statistical method of calculation will normally mean that rpi is higher than cpi and the basket of goods for the rpi has risen faster than that for the cpi. Therefore, tying the interest on these certificates to rpi will give higher returns than if they were tied to cpi.
• If inflation averages 3% a year over the next 5 years, these bonds will give better returns than the best five year bonds on the market at the moment for 40% taxpayers: Given their extra security, 40% taxpayers will find these certificates more attractive than the top-paying five year bonds which offer 5% a year for five years. Inflation on the rpi measure is currently over 6% and is likely to stay high. When interest rates start rising, rpi will rise too, because it reflects mortgage rates which are tied to official interest rates.
• As long as inflation averages more than 2.5%, these certificates are better for 50% taxpayers than best five year bonds on the market: For any 50% taxpayer, inflation only has to average more than 2.5% over the next 5 years for these certificates to do better than the best savings accounts in the market.