Money News

NS&I launch new Index-linked savings bonds

By Martin Fagan - news@consumerchoices.co.uk

Paying 0.5% on top of the Retail Price Index, the new bond offers a good tax free return.

Following the Chancellor’s promise in the March Budget, the government-owned National Savings & Investments (NS&I) has launched a new five-year index-linked savings bond, which will pay a return of 5.8% on your cash.

Inflation is measured by the Retail Price Index (RPI), which currently stands at 5.3%. Because of this, the Index-Linked bond, which gives savers a protection against inflation, is paying a return of 5.8% and is exempt from UK Income Tax and Capital Gains Tax.

The new NS&I accounts run for five years and with a maximum investment limit of £15,000.

According to Moneynet.co.uk, no other provider is offering five-year bonds that will match or beat inflation. The best alternative is Birmingham Midshires's five-year fixed-rate bond paying 5.05%, but any interest paid has 20% tax deducted.

So popular are Index-Linked bonds, that in July 2010, savers worried about rising inflation piled into the product in such numbers that NS&I withdraw it from the market.

“Our aim is to keep these new Savings Certificates on sale for a sustained period of time and to enable as many savers as possible who wish to invest to do so,” said Jane Platt, chief executive at NS&I.

“With this in mind we will be offering a five-year term and we understand fully we will see very high demand for Index-linked Savings Certificates.”

Linking the bonds to the RPI is to a saver’s advantage. The Bank of England’s base rate is based on the Consumer Prices Index (CPI) which is currently 4%. The RPI differs from the CPI because it includes Council Tax bills and mortgage repayments and is currently higher than the CPI at 5.3%.

According to the Bank of England’s latest Quarterly Inflation Report, the Bank predicts CPI may hit 5% this year and RPI could hit 6%.