Find yourself an inflation-beating account
The savings accounts, which paid a tax-free return of 0.5 percentage points above the Retail Prices Index, running at 5.2% in August, had been on sale for almost four months.
There had been almost half a million sales of the index-linked certificates during that time. Jane Platt, chief executive of NS&I, says the products had to be pulled so that the net financing target of £2 billion, set by the government, was not exceeded.
There are no other risk-free and tax-free saving products on the market that offer returns above inflation. With the official rate of inflation – the Consumer Prices Index – rising to 4.5% in August, basic-rate taxpayers need an account paying at least 5.63% to beat inflation and gain benefit in real terms from their savings, while higher-rate taxpayers need a 7.5% interest rate, according to Moneyfacts.
Savers that did manage to snap up an NS&I certificate will, upon maturity, be able to keep their investment for another term of the same length. Otherwise they can reinvest into any of the other savings certificates on offer to existing customers.
For savers that missed the boat, there are some alternatives. For savers that want a tax-free account, Barnsley Building Society, Chelsea Building Society and the Yorkshire Building Society offer six-year cash ISAs. These pay the increase in RPI or 2.5%, whichever is greater, on a minimum balance of £3,000.
The Post Office have just this week re-issued its popular inflation-linked bonds. Although not as lucrative as the previous offering, these new bonds do offer RPI plus 0.25% for three-year bonds and RPI plus 1.5% for the five-year version.
Meanwhile First Direct has a regular saver account that although is not inflation-linked, offers a high 8% return. Savers must open a current account with the bank first and then pay in a monthly amount between £25 and £300 to the Regular Saver Account. No withdrawals are allowed in the first 12 months.
Caxton FX has recently launched a bond. It is not inflation-linked or risk-free, but does offer a better return than a savings account.
The four-year bond pays 7.25% gross per year, with interest paid twice a year. The minimum investment is £2,000 and the maximum is £50,000.
The offer will close by 21 October.
The Caxton bonds are not covered by the Financial Services Compensation Scheme should those companies go bust during the lifetime of the bonds. NS&I products are backed by the government, so in theory are risk-free, while banks and building societies are covered by the FSCS for their deposit-based accounts (up to a limit of £85,000 per person, per firm).
This article was written for our sister website Money Observer
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).