Post Office's RPI-linked bonds offer savings lifeline

Hard-pressed savers scrambling to beat inflation were offered a lifeline last week when the Post Office reintroduced its retail price increase (RPI) linked bond.

The bonds, which were withdrawn a few weeks earlier, had been reissued but offered a less generous but still inflation beating rate of return. The three-year fixed term now pays RPI plus 0.24 per cent (compared with 0.49 per cent previously) and a five-year term is plus 0.98 per cent (compared with 1.46 per cent).

"They launched this quicker than I expected, probably because the rates aren't quite as good as a few weeks ago, so there will be demand from other customers," said Ed Bowsher from financial advice site Love Money.

But with RPI standing at 5.2 per cent, the rates of return on the account are not to be sniffed at, particularly as best buy savings accounts barely top 3 per cent. "It's not a bad deal. It's guaranteed to beat inflation, although an RPI plus 0.24 per cent isn't a fantastic reward for locking your money away for three years," Mr Bowsher added.

Tony Waltham from Blue Sky independent financial adviser said: "A fixed-term growth bond is not suitable for people who want to invest their capital for income. It'll be enormously popular but it may not be entirely suitable for everyone."

Another disadvantage with an index-linked bond is that you cannot withdraw money as and when you need it, often incurring high penalties if you want access to your cash before it matures.

This differs from some fixed-rate accounts, where you're able to withdraw a certain amount each year. Index-linked bonds are suitable really only for people who are certain that they don't need to touch their money.

"Consumers have to prepare for their money to be tied up, and even if inflation did go down it shouldn't matter as they're not trying to maximise their return," said Mr Waltham.

Despite these limitations, the offer is likely to be snatched up quickly. It's advertised as being available till January 2012, but if it's oversubscribed then it will be withdrawn earlier.

Mr Bowsher advised: "Consumers should assume that it will only last a fortnight. The products will be popular; people are worried about inflation and want protection – even if the return is taxable."