Post Office inflation-linked bonds are backSavers can get RPI plus 0.5% after five years

19 January 2012

Applications for the new bonds have to be made by post.

The Post Office is accepting postal applications for 3-year and 5-year inflation-linked bonds until 29 March but warns that the new issue may be over-subscribed. 

Index-linked saving

Index-linked accounts offer savers a chance to beat inflation. They have been extremely popular, with the best-known being NS&I Index-linked savings certificates. These are not currently available and Post Office Inflation Linked Bonds are the most similar fixed-term product. If you can tie-up funds for 3 years, the bond pays RPI (the retail price index) plus 0.25% per year, while those who lock in for 5 years get RPI plus 0.5% per year. 

The rate of inflation has been a cause of concern for savers for several years. From 2.8% in December 2008 and 3.8% in December 2009, RPI reached 4.7% in December 2010 and peaked at 5.7% in September 2011, before beginning to fall back. It currently stands at 5%. CPI (the consumer prices index) is slightly lower at 4.2% and both are predicted to fall further by the Bank of England.

Long-term returns       

Although the new Post Office bonds guarantee to beat inflation, they do not offer savers a specific rate. Unlike other fixed-term saving, the return from inflation-linked bonds is impossible to predict with any degree of certainty. 

If inflation falls to the Bank of England's forecast rate of 2% (CPI) then the eventual yield to savers may compare unfavourably with other fixed-term accounts you can currently use to lock your money away for a similar period. The best fixed-rate rate savings accounts offer 4.45 % per year  for a 3-year investment and 4.7% for a 5-year fix. 

Points to watch

Savers considering Post Office inflation-linked bonds should note that these are provided by the Bank of Ireland and not NS&I. Deposits are protected by the Financial Services Compensation Scheme but only up to £85,000 per person. NS&I accounts have unlimited cover as they are underwritten by the Treasury. 

The bonds require a single deposit at the start of the 3-year or 5-year period and no early withdrawals are permitted. Anyone who needs to access funds before the bond matures will pay a 'breakage charge' and may get back less than they invested.

Which? personal finance expert, Ian Robinson said: 'Savers also need to remember that interest paid on these bonds is taxed at the standard rate unless you are registered as a non-taxpayer. This could significantly reduce the amount you earn. If you are looking to maximise your return, it makes sense to save tax-free in a cash Isa. Check the rates carefully and remember you can save up to £5,640 a year in one of these accounts.'    

More on this...     

  • Call the Which? Money Helpline - if you require help with your savings
  • Best rate saving accounts - for instant access and fixed-term accounts
  • Best rate cash Isas - how to find the best tax-free savings accounts

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