Kent Reliance launches inflation-linked cash Isa But Which? raises concerns over structured deposit

07 April 2011

New inflation linked cash Isa launched

We believe that structured deposits are too complex for most savers

Kent Reliance has become the latest bank to launch a cash Isa to help savers fight rising inflation, joining Yorkshire Building Society and the Post Office, which launched products in February 2011.

The Kent Reliance cash Isa is a five year, fixed term savings product which will pay interest based upon the growth of the Retail Prices Index (RPI) at the end of the term. But Which? is concerned that yet another bank has launched a structured deposit product, and warns consumers to think hard about this inflation-linked account before they decide to tie their money up.

How does Kent Reliance’s inflation-linked cash Isa work?

The account opens on 1 June 2011 and matures on 31 May 2016, and will pay 100% growth of the Retail Prices Index plus 2%.

Therefore, if the Index increases by 15% between 2011 and 2016, you’ll receive 17% after five years.

What are the issues with this inflation-linked Isa?

Kent Reliance’s inflation-linked cash Isa is a type of structured deposit. This means that the interest rates paid out by the product are linked some kind of index. 

Which? has criticised these types of savings accounts in the past, as we believe that they are too complex for savers and have historically delivered poor returns.

The Kent Reliance cash Isa pays out returns on maturity. At the moment inflation might be high, but it is difficult to forecast where inflation will be in five years time – even the Bank of England only generates inflation forecasts for three years in advance. Therefore, it’s difficult to know whether or not putting your money away for such a long period is going to benefit you.

If the Retail Prices Index falls or remains the same, you’ll only get 2% - a measly 0.39% annual growth – after five years of saving.

Concerns with the marketing material

We believe that Kent Reliance’s marketing material for its inflation-linked cash Isa could be potentially misleading to consumers. It cites three examples of how the index might grow over the next five years – 32% growth (leading to a £3,200 gain on a £10,000 investment), 0% growth (leading to just a £200 gain) and a 30% fall in the index (again, paying just £200).

However, when we analysed RPI from 1987 onwards, we found that the average five year growth of the index was 17.2%. In fact, the last time that the index grew by 32% was in 1993. Since 1987, it has never fallen over five years, let alone by 30%. 

The Financial Services Authority has recently raised concerns about the marketing of structured deposits and we would like to see providers putting more realistic projections in their marketing material. Otherwise, consumers are at risk of being misled or investing in a product because of the publication of a high hypothetical headline rate.

We’re also concerned that the product is marketed as a cash Isa, yet the projections are based upon a £10,000 investment. This means that only £5,340 of a customer's savings would be sheltered from tax on maturity.

Which? can help you find the cash Isas paying the top rates, and help you switch to a Best Rate deal with our unique Savings Rate Booster tool

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