Savers struggle to beat inflationExisting NS&I customers can still stay ahead

17 November 2010

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The current inflation rate is between 3.2% (CPI) and 4.5% (RPI), making it difficult to find an inflation-busting savings account. However, those with maturing NS&I Savings Certificates can reinvest their money and continue to earn RPI plus 1%, tax-free. 

Inflation-beating interest

To beat inflation, savers need to get 5.6% before tax, if they are standard rate taxpayers and 7.5% if they are 40% taxpayers. The only way that most people can get near these rates is to lock their money away for five years in a fixed-rate account.The best fixed-rate interest rates are currently 3.15% for a one year fix from Skipton Building Society, and 3.65% for a two year fix from the Post Office. By locking your money away for five years you can get 4.5% from the AA.

Tax-free saving   

Tax-free saving in a cash Isa is another way of almost keeping up with inflation. The best cash Isa rate is currently 4.25% for a five year fix. 

For existing NS&I customers, reinvesting their money in newly issued Index-linked Savings Certificates is a great opportunity. Those with certificates maturing this month (having invested for 3 years in November 2007) will have earned a return of 4.44% tax-free, with the index-linking accounting for 3.09% and the extra fixed interest 1.35%. 

An NS&I spokesman said: 'The future return on an investment in Index-linked Savings Certificates is not certain as no one knows what will happen to inflation in the future. However if we were to assume the increase in the RPI index over the next three years equates to 3%, and with fixed interest of 1% added on, you would need to obtain an equivalent rate of 5% (as a basic rate taxpayer, and 6.67% as a higher rate taxpayer) in any other taxable savings product to make the same return.'

The certificates are not currently available to new customers. Only those whose existing NS&I certificates have come to end of their 2, 3 or 5 year term are eligible to reinvest funds in this way. New customers can invest in other NS&I products, but not the index-linked Savings Certificates.

The outstanding nature of the NS&I deal explains why it was closed to new customers in July this year. The government-backed agency is required to balance cash flows by adjusting its rates in a way that does not take an excessive amount of business away from the rest of the banking sector. NS&I have suggested that savings certificates may be re-launched in the new year but have yet to give further details

Best rates

In the current climate, savers should check the rate they are being offered. In many cases this will be far less than they could get by shopping around. Which? has an online savings booster that enables you to check interest rates and see what is the best deal.

Which? also publishes tables of Best Rate instant access accounts, Best Rate notice accounts, Best Rate fixed rate accounts and Best Rate cash Isas. 

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