Post Office launches two inflation-busting accounts
Both the three and five-year bonds are linked to the retail prices index (RPI) of inflation, which currently stands at 5.2%.
Interest is worked out from the average RPI rate every August, plus a guaranteed return of 1.5% on the five-year account and 0.5% on the three-year account.
There is a minimum investment of £500 and a maximum of £1 million and the money cannot be accessed until the end of the fixed term. Additional deposits aren't allowed.
The accounts are available until 2 September but will be withdrawn if over-subscribed and you can apply by telephone, in branch or online.
Richard Norman, director of savings and investments at the Post Office, says the accounts will be most suited to long-term savers.
"Rising inflation means for many saving is becoming less attractive. We're helping our customers protect their savings from the impact of inflation with our inflation-linked bonds," he says.
Although the accounts will guarantee to beat the level of inflation, Louise Holmes, spokesperson from Moneyfacts, says as the bonds run for either three or five years, if RPI drops during this period savers will receive a lower return than hoped.
The accounts are likely to prove popular but still do not match the recently launched NS&I index-linked savings certificates, which offer tax-free returns (the Post Office bonds are taxable).
There is also a smaller minimum deposit of £100 with the NS&I bond and, unlike the Post Office accounts, it is possible to withdraw your money after one year with NS&I.
"Overall the Post Office bonds are reasonable, but are still some way short of the NS&I offering," says Patrick Connolly, spokesperson for independent financial advisers AWD Chase de Vere.
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.
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).