Inflation linked savings products launched But Which? warns consumers to take a closer look
24 February 2011
The Post Office and Yorkshire, Chelsea and Barnsley Building Societies have both put forward savings solutions to help you fight the sharp rise inflation with the launch of two new savings products this week.
The Post Office has launched a five year inflation linked savings bond while the building societies have introduced two new deposit products manufactured by Credit Suisse. It’s one of the Credit Suisse products, a form of structured deposit, that has raised our concerns and Which? warns consumers to take a closer look at these inflation linked products before tying their money up.
Post Office’s new account
The Post Office has launched a new five year bond for savers looking to protect their money from inflation. The rate of inflation, based upon the Retail Prices Index (RPI), shot up to 5.1% in January 2011.
The new launch from the Post Office will pay an interest rate of 1.5% plus the rate of inflation, measured every April, for five years. The returns are paid on maturity of the bond in 2016.
If there is negative inflation in any one year throughout the term of the bond, interest of 1.5% will be paid. Minimum investment in the bond is £500 and it's available until 27 April 2011.
Inflation protection from Credit Suisse
Credit Suisse have taken a similar approach with one of its new launches through Yorkshire, Chelsea and Barnsley Building Societies. The Protected Capital Account - Inflation Linked 1 will pay the annual rate of RPI inflation, measured every March, for five years. Returns are paid after 11 May of each year of the five year term, and minimum investment is £3,000.
But Credit Suisse will only be paying an additional 0.1% on top of this – so if inflation is negative in any one of the five years of the plan, you only get 0.1%.
Long term inflation product
The second tranche in Credit Suisse’s new product launches is the Protected Capital Account - Inflation Linked 2. This is another five year product which will pay the growth in the Retail Prices Index plus 1.5% at the end of the term.
The product will measure the index in March 2011. If the index is higher in March 2016, then Credit Suisse will pay the percentage increase plus the minimum 1.5%.
The disadvantage of this product is that you’re not benefiting from annual payouts. So you could tie your money up for five years and, if there’s negative inflation over one or two years you could end up with a lower return.
Beware structured deposits
Which? has criticised these kind of structured deposits in the past, as we believe that they are complicated and potentially misleading to cautious savers looking to protect their money.
We have concerns that the Credit Suisse literature contains potentially misleading information. The example it provides of how the products works is that of a 30% return in the Retail Prices Index over five years.
The last time this occurred was in 1993, and the average five year return of the index over the past 25 years has been 16.1%. With the extra 1.5% added, that's a return of 17.6%, or 3.31% annually. We believe that its example might be unrealistic and potentially misleading to consumers.
As with any fixed term product, if you want to leave early you may face a charge. The Post Office bond charges a breakage fee which is calculated based on how far into the term you are and what the current market is like. The Post Office warns that leaving the bond early may cause you to get back less than you put it.
Similarly, the Credit Suisse products have early exit charges and, again, it warns potential investors that the plans are not designed for early termination. Credit Suisse states that any amount returned will never be higher than the amount initially invested, regardless of what has happened to inflation since you bought the product.
Should you invest in these products?
Inflation is a real threat to the value of your money so it’s good to see that there are some companies launching products to help savers tackle this.
But some are better than others. The Post Office product will be paying an attractive rate of interest certainly in the first year of the term and the addition of 1.5% per annum as a base interest rate. This outstrips what Credit Suisse is offering.
While the second Credit Suisse product is linked to inflation, the way it looks at inflation over a five year period can make it harder to judge how much you might get. In 2006, few would have predicted that five years later we would have such low interest rates.
Tying your money away for five years is a long commitment and this product does not offer the most appropriate protection from inflation in comparison to those that are calculated annually.
You also need to be aware that these products can have early exit charges and for some if you need to cash-in early you will only get your original capital back no matter what has happened to inflation.
Remember that inflation linked products will offer you protection from rising prices but you may miss out on market leading rates when interest rates increase. This is the sacrifice you will make when tying your money into inflation protected accounts.
Which? Money when you need it
You can follow @WhichMoney on Twitter to keep up-to-date with our Best Rates and Recommended Provider product and service reviews.
Sign up for the latest money news, best rates and recommended providers in your newsletter every Friday.
Or for money-saving tips, and news of how what's going on in the world of finance affects you, join Melanie Dowding and James Daley for the Which? Money weekly money podcast
For daily consumer news, subscribe to the Which? news RSS feed here. And to find out how we work for you on money issues, visit our personal finance campaigns pages.