National Savings' move is major blow to savers

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The Independent Online

anyone hoping to beat inflation with their savings suffered a blow this week after the Government withdrew its index-linked National Savings certificates. The reason? They have been attracting too much money.

"We've seen significant amounts of money invested over recent months and so we've taken the decision to withdraw savings certificates from general sale to ensure that we do not exceed the upper end of our net financing target range," says Jane Platt, chief executive of National Savings & Investments (NS&I).

The flood of cash into certificates is easy to explain. With the base rate being held at 0.5 per cent for the 16th month in a row earlier this month, savings rates remain paltry. Apart from some deals linked to current accounts, you'll be hard-pressed to find much more than 3 per cent on a two-year fixed-rate savings account. Yet three- and five-year savings certificates have been effectively offering 6 per cent.

That's because they are linked to inflation, specifically to the Retail Prices Index (RPI), which has risen to 5 per cent. With the certificates offering 1 per cent above that, it's hardly surprising that NS&I raked in a near-record £5.4bn of funds in the first quarter of 2010, according to its latest results published this week.

The certificates were suddenly pulled at midnight on Sunday giving savers no chance to quickly stash cash in them as a hedge against inflation. For that is their virtue: if they always pay more interest than inflation, then you're never going to see the value of your savings falling in real terms. However, if you leave your cash in a standard savings account, then the inflation effect means you may often be losing money, as is the case with most of the mainstream accounts at the moment.

It hasn't always been this way. When the base rate was higher and inflation lower, the returns on National Savings certificates were often easily beaten. But the present situation made them one of the best homes for savings. Some 580,000 people currently hold the certificates and won't be affected by their withdrawal. They will be able to roll up their savings into the same terms when their current certificate reaches the end of its term.

NS&I said the certificates will return, but they refused to be drawn on when that might be. However, a spokesman was quick to deny rumours that they would in future be linked to the lower Consumer Prices Index, as has happened with pensions. He says they will remain linked to the Retail Prices Index when they are relaunched. Will they still offer 1 per cent above RPI? It seems unlikely they will return on such beneficial terms.

The move has left people looking for inflation-beating returns high and dry. There has also been criticism for NS&I for cutting the interest rates paid on its Direct Saver and Income Bonds by 0.25 per cent. The rate has fallen to 1.75 per cent, or 1.45 per cent for less than £25,000 held in an Income Bond. "It's another door slammed in the face of savers who now have fewer options as they desperately seek a decent return on their nest egg," says Andrew Hagger of Moneynet.co.uk.

However, he says the move will benefit high-street financial institutions. "Although it's bad news for Joe Public, banks and building societies will be rubbing their hands to see these products withdrawn and rates cut as they'll benefit in the form of a bigger slice of savings business," Mr Hagger adds.

That view is confirmed by Martin Shaw, chief executive of the Association of Financial Mutuals."However much the Government might be tempted to raise money by offering high rates on NS&I, previous rates have been having a detrimental rate on other providers who can't write unprofitable business, especially mutuals, so the decision to withdraw from the market is a welcome one, as long as it allows fair competition to return to the savings market," he says.

Sadly, that doesn't mean we'll see a new range of more competitive products from institutions eager to attract fed-up savers. Instead, it means they will rely on their existing range of savings accounts secure in the knowledge that they now look more competitive simply because the best available rate has gone.

So what should savers do now to beat inflation and do better than the relatively paltry returns paid on most accounts at present? "For all but the most cautious investors, the best approach to beat inflation is to hold a diversified investment portfolio containing shares, fixed interest and property," says Patrick Connolly of AWD Chase de Vere.

He suggests considering the following investment funds: Artemis Income, Schroder UK Alpha Plus, Cazenove European, JPM US, JPM Emerging Markets, Fidelity South East Asia, Fidelity Sterling bond, M&G Corporate Bond, L&G High Income and M&G Property Portfolio.

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