Personal finance: Cash in early issues of `granny bonds'

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Indy Lifestyle Online
Investors are still not sure whether the next move in interest rates will be upwards but the upward tick in the rate of inflation has certainly increased the appeal of index-linked national savings certificates.

The 11th issue, which went on sale this summer, pays 2.75 per cent on top of the current rate of inflation as measured by the retail price index, provided they are held for five years. The interest is free of income tax and the capital is also indexed against inflation.

Unlike index-linked gilt-edged stocks, which are index-linked to the rate of inflation eight months in arrears, index-linked savings certificates are indexed to the latest inflation figure available at the start of each sales month.

Until 30 November that is the September figure published in October. From 1 December it will be the October figure released earlier this month.

The previous issue pays only inflation plus 2.5 per cent.

But it is not really worth the while of people who bought the earlier issue switching now because the published premium on top of inflation is an average rate which is only reached in the fifth and final year.

The premium is lowest in the first year and is highest in the fifth and final year.

But it does pay to cash in earlier issues of index-linked certificates which have already reached maturity because they then earn only the so- called extension rate, and the ongoing interest is only indexed with no premium above the retail price index.

So if you have a set of old certificates tucked away in the bureau, look them out now, take them in to the post office and ask to have them reinvested in the current issue.

The first issues, of course, were available only to pensioners, hence the popular name of granny bonds, and even now 70 per cent are bought by the over 55s and only 5 per cent by the under 35s.

- Clifford German