Nest eggs exposed to the ravages of inflation as options dwindle
End of NS&I bond leaves savers with few choices
Sunday 11 September 2011
Despairing savers were dealt a blow last week when National Savings & Investments (NS&I) withdrew its inflation-beating bonds, leaving them with little else to beat the rising cost of living.
"Until the Bank of England does actually manage to control inflation, savers will see the value of their money whittled away month after month and there will be nothing they can do to protect themselves properly," says Dr Ros Altmann, an investment expert and the director-general of Saga. "Although the maximum amount that could be invested in the NS&I bonds was £15,000 per person, that was still a very useful nest egg."
The index-linked savings certificates were on the market for only four months but in that time reached about 500,000 sales, with the "significant amounts of money invested" forcing NS&I to pull the plug lest it exceed its financing target of £2bn. Savers who have invested their money in time will earn the change in Retail Prices Index (RPI) on the anniversary of the bonds plus an average of 0.5 per cent for five years, tax free.
Although the Consumer Price Index (CPI) rose from 4.2 per cent in June to 4.4 per cent in July, RPI remained unchanged at 5 per cent, but at current levels, the bonds would pay an unbeatable 5.25 per cent over one year.
The announcement from NS&I follows Birmingham Midshires pulling its three- and five-year inflation-linked products at the end of August, but there are, for now at least, a few alternatives still around. If you want to beat inflation, there are only five accounts to choose from, compared with a choice of 91 inflation-busting accounts last year, according to Moneyfacts.co.uk.
All five accounts are individual savings accounts (ISAs), so you are restricted to investing £5,340 in cash for the current 2011-12 tax year. The Combination fixed rate ISA from Yorkshire/Barnsley Building Society does pay 5 per cent but requires savers to put 70 per cent of their initial deposit into a riskier Aviva investment product. A better alternative may be the Cash ISA fixed rate bond (issue 11) from Yorkshire Bank and Clydesdale which pays a CPI-beating 4.5 per cent till 29 April 2016. The minimum deposit is £2,000 and you are also allowed to transfer money from previous years' ISAs if you want to shield even more money.
"While a handful of ISAs pay above inflation, the amount that can be invested in such accounts is limited, so restricts how much benefit they can be for savers in beating inflation," says Michelle Slade from Moneyfacts. "Two of them require you to open an investment product, which means for many these won't be a real option. The others require you to commit funds for five years, but many savers prefer a shorter commitment."
There are also inflation-linked accounts, although many of these are due to close soon. Cambridge building society is paying RPI, calculated using the RPI from 2011 to 2016 in September each year, plus 1 per cent on minimum investments of £5,000 over a five-year term. Yorkshire is also offering its Protected capital account (Inflation linked 8) which pays the greater of the percentage change in RPI over six years or 2.5 per cent AER. You do have to lock up your money for six years and the minimum deposit is £3,000, but the great news is that you can operate the account as an ISA for tax-free returns. And as with the Yorkshire Bank/Clydesdale ISAs mentioned above, you can transfer old ISA money to protect an even larger sum from inflationary erosion.
Those who move quickly can secure the Post Office's Inflation-linked bonds before the closing date for applications on Friday. These pay RPI (as measured in August of each year) plus either 1.5 per cent for five years, or 0.5 per cent for three years.
"These are challenging times and people are being offered little incentive to save as rising inflation continues to erode interest in savings accounts," says Richard Norman, the director of savings at the Post Office. "With the base rate remaining at an all-time low, cutbacks across the board and rising prices, savers are feeling the financial pinch."
These bonds can be opened with £500 but no additional deposits are permitted and you can't touch your money until the bond matures. Interest is paid in one lump after the three or five years are up, so you don't benefit from compounding interest. Any interest is taxable so if you're a taxpayer, these are not guaranteed to beat RPI.
"Savers face the unwanted dilemma of keeping their money in cash and accepting it will lose value in real terms or taking more risk to try to generate better returns, though with the current weaknesses in the economy and the stock market this won't be a welcome prospect for many people," says Patrick Connolly from independent financial adviser (IFA) AWD Chase de Vere.
If you are willing to look outside of deposit accounts to inflation-proof your money, the key is always to diversify and keep a balanced portfolio containing cash, shares, property and fixed interest to avoid exposing yourself to unnecessary risk. Mr Connolly recommends a cautiously managed fund such as Cazenove Multi Manager Diversity for nervous investors, which invests equally in shares, fixed interest and then other investments such as property, hedge funds, structured products and gold.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
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