Are NS&I bonds an option for short–term savers?
Short-term savers can still cash in with NS&I's inflation–linked bonds, even though they are designed to be held for five years.
"Using the NS&I bond as a one-year savings account is worth considering due to the flexibility it offers in terms of access after one year," says Peter Chadborn, partner of IFA Plan Money.
Despite being advertised as five-year deals, savvy savers can withdraw their money from the popular accounts after just one year and still receive interest with no penalty at a rate that far exceeds the best one-year accounts. (It should be noted that doing so before 12 months will see savers lose these benefits.)
On top of the promised 0.5% interest, the bonds are index–linked to the retail prices index (RPI), which is currently 5.2%. The 0.5% interest rate is averaged out over the five-year term so savers who close their account after one year would receive 0.25% interest plus the index–link. Based on the current RPI level that would equal 5.45% in total.
By comparison the best one-year fixed–rate accounts are currently paying in the region of 3.5%. FirstSave's online-only account pays the top 3.5% while Barnsley Building Society's online bond pays 3.4%.
In addition there is no tax to pay on the NS&I bond, meaning other best buy savings accounts will struggle to keep up. Using the 5.45% figure, a savings account would need to pay 9.08% for a higher–rate taxpayer and 6.8% for lower–rate taxpayers to achieve the same level of growth.
However, it's worth pointing out that this is all based on RPI remaining at its current level for the next year. The index-linking aspect to the certificates is variable and worked out by looking at RPI figures two months before account opening and two months before account closure. NS&I then uses a complicated calculating system to work out exactly how much savers will receive.
Justin Modray, founder of Candid Money thinks that the bonds are “no brainers" for those who have already used up their ISA allowances and particularly for higher–rate taxpayers.
But he issues caution to others because of the risk factor. Essentially savers are taking a gamble on RPI remaining high, if it drops then the 0.25% interest that's added onto the index link, after one year, may be unable to compete with other savings accounts.
“For most people I wouldn't necessarily recommend using these bonds over other savings accounts," says Modray.
“There has been a lot of attention on the high rate because of inflation and that they are tax–free but that's not quite an accurate picture. It's probably unlikely RPI will continue to be as high as 5.2% over the next year so the final rate will drop."
However, the fact that these bonds may not look so competitive after five years makes them even more attractive as a short–term option, says Chadborn. He adds:
"In times of low interest rates you have to use your imagination and make the deals work for you rather than be encumbered by inflexible arrangements"
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
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).
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.