Money Grouse: Falling RPI dents National Savings certificates

FALLING retail prices can play havoc with savers' expectations about returns from index-linked National Savings certificates.

Henry Passer is a retired chartered accountant who was horrified to discover that the value of the certificates can fall if the retail price index (RPI) falls over a month.

He has invested in 5th issue index- linked savings certificates. These promise to increase a saver's money by the rate of inflation, plus 4.5 per cent compound, if held for five years.

'I have discovered that my savings have gone down in value because the rate of inflation has gone down,' he said.

It is apparent from the National Savings prospectus for the 5th issue certificates that it would be possible for the value of a holding to fall - although savers will never get back less than they put in - but Mr Passer believes this is not made clear enough.

'I thought that if the rate of inflation was 1.8 per cent that was the rate I would receive plus 4.5 per cent.'

But the guaranteed 4.5 per cent is added gradually in stepped amounts over the five years. Certificates are credited on their anniversary date with the rate of inflation over the previous year, plus a portion of interest.

It is possible to cash in the certificates before five years, however, and they are gathering value all the time. No interest is payable until after the first anniversary. From then on certificates cashed between anniversaries are credited with one twelfth of the annual interest due in that year and inflation over each complete month from the last anniversary.

Lists of these encashment values are published monthly and made available in Post Offices so that savers can see that they fall month-on- month if there is negative inflation.

The RPI figures released yesterday showed that prices rose 0.4 per cent in March, to give an annual inflation rate of 1.9 per cent. But there have been several months in the past two years when prices have fallen. For example, the RPI fell 0.2 per cent in July 1991, by 0.4 per cent in July 1992 and 0.9 per cent in January this year. These figures show only what has happened to prices over a month, however, and the cost of living over a year may still have increased.

Someone who bought pounds 100 of 5th issue certificates in July 1990 would have received pounds 112.03 if they cashed them during January this year, but pounds 111.68 if they waited until February.

A National Savings spokesman said other customers had queried the falling value of their holdings, but said the reasons were spelt out in the prospectus. He pointed out that savers who hold their certificates for the full term will see a profit of at least 4.5 per cent and unless there is negative inflation over the period, there will be an additional credit for any annual rises in the RPI in the intervening years.

Write to Money Grouse, The Independent, 40 City Road, London EC1Y 2DB. Include a daytime telephone number if possible. Do not send SAEs or original documents as we cannot guarantee to deal with every letter personally.