National Counties Building Society (NCBS) have re launched their Index Linked Savings Account with a rate of interest which will help your savings keep pace with inflation. The account has a five year fixed term starting on 30th November 2010. The interest paid is the movement in RPI (Retail Price Index) plus an additional 50% of the change in RPI over the five year period.
For illustrative purposes NCBS has quoted an interest rate of 4.57% gross AER, based on changes in RPI from September 2005 to September 2010. It should be noted that RPI is not guaranteed to produce the same results over the term of the product.
Should there be no or minimal change to the RPI over the five years, a minimum guaranteed payment of 7.50% gross will be earned.
Up to the start date of 30th November 2010 your savings will receive interest equivalent to 1.46% gross AER, this is capitalised at the start date, increasing the level of your initial investment.
Who can open the account?
The minimum that can be saved is £1,000 and the maximum £1,000,000.
The account can be opened by any individual and can be held in joint names.
The account is open to existing members of the NCBS and also new members.
What are the advantages of this account?
The account guarantees a gross return equal to inflation, for nil and basic rate taxpayers the net return is also guaranteed to beat inflation, assuming of course that income tax rates are the same at maturity as the current tax year
The return on the account is linked to RPI, which tends to run at a higher level than CPI (Consumer Prices Index)
The account can be opened with as little as £1,000.
NCBS participates in the Financial Services Compensation Scheme (FSCS). Payments under the Scheme are limited to a maximum of £50,000, (this is set to rise to the equivalent in sterling of 100% of the first €100,000 from 31st December 2010) of an investor’s total shares and/or deposits in a Society. Most investors are covered, including individuals and small firms. Where a joint account is held the compensation limits apply to each individual.
What are the drawbacks to this account?
The account has a five year term and cannot be accessed during that time, you therefore must be sure that you do not require access to the money during this time.
The account cannot be opened as a Cash ISA, therefore if you are a tax payer in the year of maturity interest will be taxed.
Once the account has been opened no additional deposits can be made.
What are the alternatives?
Since NS&I withdrew their Index Linked Certificates earlier in the year, which provided a tax free return of inflation, measured by RPI, plus 1% over a three or five year period, there have been very few, if any, options for savers looking for a return linked to inflation.
This latest offering from NCBS would seem to meet the needs of savers, at least those who are nil or basic rate taxpayers, who are looking for that simplest, yet hard to find thing, of a return equal to inflation.
With RPI currently running at 4.6% the only savings account offering a gross interest rate sufficient to match this is Birmingham Midshires with their five year fixed rate bond. This account however provides no guarantee that it will match inflation as clearly the interest rate would not rise in line with inflation like the NCBS would.
Is there anything else I should know?
Yes, the product could be withdrawn quickly, and with very little notice. It is currently the only savings account available which will link interest to inflation; as such it is likely to be very popular and inevitably oversubscribed.
Issue 1 was withdrawn very soon after it was launched due to its popularity.
How do I open this account?
The Investment Sense View
The NCBS Index Linked Savings Bond is currently the only savings account where the interest rate is linked to inflation.
If you are a nil or basic rate tax payer looking for a net return from your savings guaranteed to beat inflation then the latest index Linked Savings Bond from NCBS could be the answer.
Higher rate tax payers could still find the account attractive as the gross return is linked to RPI, which is not available elsewhere. Furthermore as interest is paid only at maturity the account is attractive to those who are currently paying higher rate tax but may not be doing so in 2015, for example due to retirement.
Clearly your savings would not be accessible for five years, meaning that you must check carefully you can tie up any money you chose to invest for that.