Half a million savers currently hold Index-linked Savings Certificates from the National Savings & Investments (NS&I). But from next year, the way their returns are calculated will undergo a significant shake-up.
From 1 May 2019, existing Index-linked Savings Certificate bondholders who renew will get returns based on the Consumer Prices Index (CPI) measure of inflation, rather than the typically higher Retail Prices Index (RPI).
A total of 500,000 savers will be affected by the move to the lower, but more widely used, price-tracking index. Which? explains the change and whether you should consider renewing your bonds when the time comes.
What are Index-linked Savings Certificates?
NS&I Index-linked Savings Certificates are tax-free savings bonds lasting two, three or five-years and currently offer inflation-beating rates of RPI plus 0.01%.
These products have been closed to new savers since 2011, but account holders can renew their account when they reach maturity.
Given that these accounts protect your savings from losing value in real terms – unlike most savings accounts in recent years – many people have continued to renew the deals and around 500,000 people currently hold an Index-linked Savings Certificate.
How will your savings be affected?
The move from tracking RPI to CPI is a big change for savers investing in these certificates.
Although your savings pot will still keep pace with inflation, it will track an index that since January 2011 has on average been 0.79% lower than RPI.
At current rates, anyone who renews their certificate would see their starting rate fall from 3.3% (September’s RPI) to 2.4% (September’s CPI).
For a saver with £1,000 invested over a five-year term, that would mean a fall of £50.37 in total returns.
|Term||RPI (using September 2018 rate of 3.3%)||CPI (using September 2018 rate of 2.4%)||The difference in total return for the term of the product|
|Two-year Index-linked Savings Certificate||£1,067.29||£1,048.78||£18.51|
|Three-year Index-linked Savings Certificate||£1,102.62||£1,074.05||£28.57|
|Five-Year Index-linked Savings Certificate||£1,176.82||£1,126.45||£50.37|
Why is NS&I switching from RPI to CPI?
NS&I says the change is to recognise the reduced use of RPI by the government since 2010 and its commitment to balance the interests of savers, cost to taxpayers and stability of the broader financial services sector.
By indexing new investments to CPI, NS&I say the cost to the taxpayer is forecast to reduce by £610m over the next five years.
RPI and CPI both aim to measure the change in the cost of buying a ‘basket’ of products and services. However, they cover different items and use different formulas.
RPI was described as a ‘very poor’ measure of inflation in a recent ONS report and it lost its status as a national statistic in 2013.
As a result, the indexation of direct taxes, benefits, public sector pensions, the state pension and most recently business rates have all moved from RPI to CPI.
However, many things that cost us money are still linked to the higher RPI rather than CPI, including mobile phone bills, student loans, rail fares and the uprating of ‘sin taxes’ which relates to items such as cigarettes and alcohol.
The government says that moving away from RPI is complex and potentially costly. In the latest Budget, the Treasury says that moving the remaining uses of RPI to CPI for indirect taxes would be at a substantial cost to the Exchequer.
Should you renew your Index-linked Savings Certificate?
The switch from RPI to CPI won’t affect any existing Index-linked Savings Certificates until the end of the investment term. However, if you decide to renew any that mature on or after 1 May 2019, your index-linking will then be calculated using CPI not RPI – which is likely to mean lower returns.
But it’s worth noting the returns from the products are still tax-free and offer unique and valuable protection from inflation, which has been very hard to achieve in recent years from traditional savings accounts.
To beat inflation today, you need to find a deal paying at least 2.4%.
The current best comparable two-year bond pays 2.1%, the best three-year deal pays 2.40% and the best five-year deal pays 2.7%.
The Office for Budget Responsibility forecasts CPI inflation to be 2.6% in 2018 and it is then expected to be around 2% until 2022.
If rates continue to creep up and inflation falls as forecasted, you may be better off switching to another savings deal to ensure your pot is getting the best return. But if rates fall and inflation stays high, you could lose out by moving your savings.
If you have an Index-linked Savings Certificate that is due to mature, you should check out the rates on offer from comparable fixed-rate deals and weigh up if you can afford to lose guaranteed inflation protection or if you are willing to take a gamble on savings rates getting better over the long term before locking in.