National Savings are back with Index-Linked Savings Certificates

NS&I have re-introduced new issues of its savings certificates, including index-linked Savings Certificates (often referred to as inflation-beating savings) and fixed-interest Savings Certificates.

The new Issues are available in a 5-year term only and offer tax-free returns based on inflation, Retail Prices Index (RPI) plus a fixed rate of 0.5%. They offer a maximum investment of £15,000. Fixed-interest Savings Certificates will pay 2.25% AER.

It is anticipated that Billions of pounds will flood into these new government backed investments as savers look to beat inflation on their savings. Savers are currently affected by the combination of high inflation and low interest rates, which means that the real value on savings are being eroded by inflation.

Although these do appear to look very attractive to savers particularly higher rate tax payers I would also consider the following points.

As we know currently inflation is at a very high level and with RPI at 5.3% it is well above the Bank of England’s inflation target. Also, at the moment interest is at an all time low and has been for some time now. Just in the last week the Bank of England has warned that inflation may rise further to a peak later this year. This would suggest that upon reaching its peak inflation will start to fall again.

It is therefore important to consider the effects of the anticipated returns over the full 5 year period where savers may be disappointed with the total return over the 5 years. It is possible to bail out after just 1 year where the return would be RPI plus 0.25%.

The anticipation over the next year or so is that interest rates are likely to start rising to bring the current high inflation under control. As inflation starts to drop the guaranteed return of inflation plus 0.5% will gradually become less attractive over time. The effect of this is that as interest rates start to rise again savers will start to receive some better rates of interest on their cash savings.

I therefore think there will be a point over the next year or so when there will be a tipping of the scales and that savers will benefit from the returns offered by the new NS&I Indexed Linked Savings in the early years of the 5 year period when inflation is still very high, as inflation drops savers will see a drop on their returns.

As a result although savers are receiving a very low rate of interest on their cash savings at present as inflation drops and interest rates increase savings will start to see some better rates of interest appear.

To conclude I would suggest that the rates currently look very attractive, particularly for higher rate taxpayers, and that they may be suitable for some savers as part of an overall savings and investment strategy to avoid the effects of high inflation.