With inflation increasing and likely to stay at current levels for some time to come it is vital for savers to try and find a real return to make sure the buying power of their money is not reduced.
We have previously highlighted how few savings accounts pay an interest rate sufficient to offset inflation, however one way you can be sure of getting an inflation busting return is to invest in National Savings & Investments Index Linked Certificates, here we take a look at this type of investment in more detail.
What are NS & I Index Linked Certificates?
They are lump sum investments designed to be held for a fixed term.
The certificates are designed to give a real return over inflation and interest is tax free.
Who can invest?
Anyone over the age of 7 can invest, they can be held on behalf of anyone under this age.
What interest rate do they pay?
Interest is added in two parts.
Firstly there is a fixed amount, set at 1% (AER) above inflation, however it is slightly more complicated as the interest is not paid in equal instalments, for example the three year certificates pay 0.85% on the first anniversary, 0.95% on the second and 1.21% at the end of the third year
Therefore to get the full benefit the certificates should be kept for the full term.
Secondly there is the variable part linked to inflation.
Interest for both parts are added each year at the anniversary of the start date of the certificate.
What measure of inflation do they use?
RPI (Retail Price Index) is used and not CPI (Consumer Price Index) which is used by the Government and Bank of England when assessing their inflation target.
The RPI includes housing costs and council tax, and is calculated in a different way, so it tends to be higher than the CPI. NS&I have always used the RPI to calculate increases in the value of Index-linked Savings Certificates, and will continue to do so.
The RPI figure that is to be used is calculated by using the RPI figure at the start of a year and at the end of the year, monthly fluctuations are ignored.
If the result is positive then this figure is used when calculating the return, if it is negative no adjustment is made.
You should remember that RPI can go up or down.
How secure are they?
Because NS & I is backed by HM Treasury your capital is 100% secure, however much you invest.
What terms are offered?
Three and five year terms are currently offered.
Can I get access to my money early?
Certificates are designed to be held for the full term.
However if you need access to your savings you can do so.
If certificates are cashed in during the first year you would get no interest whatsoever.
If they are cashed in after the first year you would get both elements of interest for each complete month that the certificate is held from the last anniversary.
Are they tax free?
Yes, the returns are completely free of income or capital gains tax.
This makes them an attractive investment for anyone who would normally pay tax on the interest they receive on their savings.
What is the maximum I can invest?
An individual can invest from as little as £100 up to a maximum of £15,000 in each issue.
Unlike ISAs, Index-Linked Savings Certificates aren’t tied to the tax year. You can invest up to another £15,000 tax-free whenever a new Issue goes on sale.
Who should they be used by?
The certificates are ideal for anyone wanting their savings to keep pace with inflation and are prepared to tie up their money for between three and five years.
They are also ideal for anyone who wants a tax free return on their savings.
Are they a good deal?
At the moment, yes they do represent a good deal, the tax free status of the certificates and the fact that they are guaranteed to pay an interest rate above inflation make them a very attractive option.
Because inflation is variable you cannot guarantee the final value of your certificate. However if you had invested £10,000 in March 2009, at the first anniversary the certificate would be worth £10,486, remember this is tax free.
You can check how much interest you are likely to get by using the calculator on the NS & I website, click here to be taken to the calculator.
Therefore a normal deposit account, which would be subject to income tax, would have to pay a gross rate of 6.075% for a basic rate tax payer or 8.1% for a 40% tax payer – these rates are just not available in the current savings market.
When might they not be right?
If you need access to your money during the first year the certificates are unlikely to be suitable as you will receive no interest if they are cashed in before the first anniversary.
If you require an income they are unsuitable as interest is added to the capital sum originally invested.
The certificates also may not offer the best return for non tax payers.
How do I apply?
You can apply online at http://www.nsandi.com/products/ilsc/applynow
You can also call NS & I on 0500 007 007.