Post Office reissues inflation-linked bond
The Post Office has launched the third issue of its popular inflation-linked bond, throwing hard-pressed savers a lifeline in the battle to generate income that beats inflation.
However, the interest rates on offer are not as competitive as those in the last tranche of Post Office bonds. The last batch, which was withdrawn on 15 September, paid retail prices index (RPI) plus 0.5% for a three-year term, and RPI plus 1.5% for the five-year term.
The third issue, which is available from today until 20 January next year, pays RPI plus 0.25% for the three-year bond, and RPI plus 1% for the five-year version.
The interest is paid at maturity on both accounts.
The rate of return is based on RPI as measured in January each year. RPI includes the cost of mortgage interest payments and has historically run at a higher level than the consumer prices index rate.
The annual RPI rate in August was 5.2%. The Post Office explains that if the product had been available the year before (and used August RPI readings as the basis for the return) the annual return for the first year would be 6.2% (5.2% + 1%) for the five-year term, or 5.45% (5.2% + 0.25%) for the three-year term.
The minimum deposit in the bond is £500 and the maximum is £1 million. No additional deposits are permitted, and the account cannot be accessed until the end of the fixed term.
Peace of mind for savers
Richard Norman, director of savings and investments at the Post Office, comments: "Since we launched the first inflation-linked bond earlier this year, inflation has remained high, leaving savers worried about the value of their hard-earned cash. This new issue of the inflation-linked bond offers them another chance to get peace of mind that their savings will be protected against the eroding effects of inflation.’
The bonds may be withdrawn earlier than 20 January if they are oversubscribed.
Applications need to be made by post and application packs and can be requested by calling 0800 169 7500 or downloaded at postoffice.co.uk/savings.
The launch comes at a time when there are few inflation-beating accounts on the market. National Savings & Investments pulled its popular inflation-linked savings certificates at the start of September.
And National Grid, which issued a 10-year bond paying 1.25% above RPI, completed its fundraising last week. It raised £260 million, making it the largest corporate index-linked bond issued in a single offering, in the sterling market, for four years.
This article was taken from our sister website Money Observer
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).