They’re back! NS&I’s savings certificates are ready to roll

They were ditched last July, and will pay less this time round – so will investors flock back to National Savings' new bonds?
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The Independent Online

National Savings and Investments' index-linked savings certificates are back, but is it with a bang or a whimper? The highly popular accounts, which track the rate of inflation – and pay a small bonus – have been off the shelves since last July.

At the time, anger from banks and building societies in particular that the NS&I certificates were sucking up too much savers' cash was widely seen as a reason for the product's withdrawal. So it's no surprise, therefore, to see the new offering from NS&I not quite as good a payer as the previous incarnation.

Last July, savers buying an NS&I index-linked savings certificate had a choice of three-year or five-year terms and in return would receive up to 1 per cent above the Retail Price Index. Now savers have only an option of a five-year term paying just 0.5 per cent above RPI. What's more, the amount that can be invested is capped at £15,000, while last July savers could place £15,000 in both a three and a five-year bond. Fortunately, the tax-free status of NS&I index-linked bonds still makes them attractive, particularly to higher-rate tax payers.

But it could have been worse, many observers thought that the RPI measurement would be abandoned in favour of the often lower Consumer Price Index measurement – which is now being used for pension scheme up-rating: "I was surprised but very pleased they remain linked to RPI: I was expecting a change to a CPI link which would have generally resulted in lower rates of return," says Danny Cox, from the independent financial adviser Hargreaves Lansdown. "I expect these certificates to be very popular and may fill their allocation quickly."

NS&I are anticipating swift business as a result of the return of the certificates, but not so swift that they will come under pressure again from the wider financial industry: "People have been waiting for index-linked certificates to come back on the market," says Gareth Headon of NS&I. "But the way we price our products is balancing fair rates, raising money and not distorting the broader financial market."

According to the Budget, NS&I is targeted to gather £2bn of net savings inflow this year, which should mean that the certificates are on sale for quite some time. "Just to put that into context," Mr Headon adds, "we plan to have £12bn withdrawn by customers a year, which means that we need £14bn of new cash deposits to reach our target. Hopefully, this means the savings certificates should be available for a sustained period of time before the targets are reached."

It's not just inflation proofing – at a time when prices have been around 10 times the level of the Bank of England base rate – which appeals to savers, it's the tax-free status of NS&I index-linked certificates.

Analysis from Hargreaves Lansdown shows that at the current level of RPI (5.3 per cent) a five-year savings certificate will pay 5.8 per cent, but, once tax is factored in, the real rate of return is much higher. A basic-rate taxpayer, for instance, would see returns of 7.25 per cent; a higher-rate payer 9.67 per cent, and an additional rate a whopping 11.6 per cent. "The higher the rate of tax you pay the more sense the certificates make," says Louise Holmes, from financial information service Moneyfacts.

But tying up your money for five years is a risk. "If you withdraw your money within the first year you don't get any interest after this. The returns get better but you need to keep your money in for five years or so to enjoy the full rate of return," Mr Headon says.

Five years, though, is a long time when it comes to inflation. Ms Holmes adds: "Who is to say that inflation will stay anywhere near these types of levels? It's possible that for part of the term at least you'd be able to get a better deal elsewhere and still enjoy tax-free status through investing in an Individual Savings Account (ISA)."

What's more, NS&I savings certificates are not the only game in town even when it comes to beating inflation. Birmingham Midshires offers a five-year inflation beating savings account, but it actually pays 1.5 per cent above RPI. Meanwhile, the Midshires also offers a three-year variant paying 0.75 per cent above RPI. However, the accounts are subject to tax, and early withdrawals are forbidden.

"If you're a non-taxpayer then the Birmingham Midshires account makes the most sense, but if you are subject to basic, higher or advanced tax rates then the numbers stack up on the side of the NS&I product instead," Ms Holmes says.

If tax-free savings are important then another possible alternative is a fixed-rate ISA. "Birmingham Midshires is offering a five-year, fixed-rate ISA at 5 per cent, while Northern Rock is paying 4.5 per cent over the same period," Ms Holmes says. "Meanwhile, Halifax is offering 4.4 per cent over a slightly shorter term, four years."

Fixed-rate accounts are just that, fixed so the rate of return will not go down or up with inflation. "You pays your money and you takes your choice as far as fixed-rate ISAs versus NS&I certificates are concerned. However, what I do like about the NS&I product is that regardless of what happens you will always keep pace with price rises and that, frankly, is brilliant," Mr Cox says. "What I also like is that when the savings term is finished you can rollover your investment into the next issue, preserving the tax-free status of your savings."

There are other options that Mr Cox points to which can run alongside an investment in NS&I savings certificates. "There is the M&G index-linked bond, which should return above inflation, and then there are UK equity income investment funds, which can give you a dividend and potential capital growth.

"At present, UK companies are paying around 4 to 4.5 per cent in dividends, which is good and around inflation, but with Mervyn King, the Governor of the Bank of England, warning last week that inflation could move higher still, perhaps you need a little more than this in your portfolio.

"Overall the stock market has done well of late against inflation. But, it's always worth remembering that NS&I guarantees your capital – you can even get your money out early with loss of interest – whereas stockmarket and bond investment is putting your original investment at risk."

No wonder, in these continuing uncertain economic times, that the return of the NS&I index-linked certificate is likely to prove very popular, even if the rate paid is not what it was last time around.

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