Leeds Building Society is offering a bond which currently guarantees to pay savers the rate of inflation (RPI) plus 1.8%.
With RPI at 5% this gives an impressive 6.8%, before tax. In exchange for tying up your money for two years, you get RPI plus 1.8% in year one (August 2008-August 2009), followed by RPI plus 1.8% for the second year (August 2009-August 2010).
The bond can be held in a cash Isa, in which case interest is tax free, or as an ordinary account, with tax deducted at 20%. The minimum investment is £1,000. The maximum is £1,000,000 for individual savers or £2,000,000 for joint accounts.
Inflation could have heavy impact on savings
The verdict of the Which? Money team is that if held in an Isa, the bond offers a return of 6.8% at current rates, which compares extremely favourably with current Best Buys. Taxation reduces the bond’s net rate to 5.44% for basic rate taxpayers, and 4.08% for top-rate taxpayers.
If inflation falls over the next few years the interest it pays could be less than alternative fixed rate accounts. Some of these offer between 6.6% and 7% and give a guaranteed return (the Leeds Building Society rate is variable).
You could invest up to £50,000 in this bond (or £100,000 for a joint account) and still be covered by the FSCS compensation scheme.
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