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.
For daily consumer news, subscribe to the here. If you have an older web browser you may need to copy and paste this link into your newsreader: https://www.which.co.uk/feeds/reviews/news.xml . Find out more about RSS in the Which? guide to news feeds.