The certificates were withdrawn last July - because they were so popular. Just as inflation was soaring, and investors began to realise that the Bank of England's assurances of inflation pressures being only 'temporary' were at best optimistic, the government removed the only proper protection savers had for preserving the real value of their hard-earned money. NS&I was having such huge inflows into these bonds, that it was taking too much money away from other savings institutions such as banks and building societies and, therefore, NS&I had to stop selling them. This was great for the banks but terrible for savers.
However, the Budget announced that NS&I would be allowed to make a profit of £2 billion this year, which has paved the way for the return of the certificates. As they were big sellers in the past due to their tax-free status and government-backed inflation protection, demand is expected to be high and there have been predictions that they could sell out within weeks.
Savers will be able to deposit up to £15,000 in the Certificates (children over the age of seven are also allowed to open an account) from which you will get a tax-free return of 0.5 per cent above RPI inflation (currently 5.3 per cent) over the five-year life of the Certificates. Higher rate taxpayers at 40 per cent would need to find returns of above 9.67 per cent gross from an ordinary taxable savings account to match the certificates.
While the terms of the new issue are less competitive than previous issues and NS&I is aiming for the products to be around for a "sustained period", potential savers should invest sooner rather than later as demand may exceed supply and there is a risk that the products may not be around for too long.
Both the Post Office and Derbyshire Building Society recently withdrew their inflation-linked deals, leaving Birmingham Midshires (www.bmsavings.co.uk, tel: 0845 603 2191) with the only comparable deal to the new NS&I offering. Birmingham Midshires offers a five-year account that tracks RPI inflation plus 1.5 per cent but returns are not tax free.
The top 5 year savings accounts are paying only 4 per cent or 5 per cent, which is still below inflation (and way below inflation after tax is deducted). According to the Bank of England, inflation is expected to peak this year, before falling back.
However, if inflation averages 3 per cent a year over the next four years, for 40 per cent taxpayers the certificates will give better returns than the best five year savings bonds on the market at the moment. For any 50 per cent taxpayer, inflation only has to average more than 2.5 per cent over the next 5 years for these certificates to do better than the best savings accounts in the market.
However, the certificates represent a long term commitment to saving so are only appropriate for those comfortable locking their money away for the five year term. It's also worth noting that the interest rate, based on RPI figures, is calculated on an annual, rather than a monthly basis meaning if inflation should fall unexpectedly during the year, customers could be stuck with a less than competitive rate.
