NS&I inflation-linked certificates: your best alternatives

by Neil Faulkner on 15 May 2012  |  10 comments
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With the confirmation there will be no new inflation-linked saving deals from NS&I this year, we look at the best inflation-beating alternatives.

We save to protect and preserve our wealth, but there aren't many organisations that are keen to help us do that.

The ultimate protection from rising prices has been available for most of the past 30 years from National Savings & Investments' (NS&I) tax-free, index-linked savings certificates. These certificates have guaranteed to beat inflation, and your entire deposit was protected by the Government.

Unfortunately, after a very long unbroken run, the state-owned savings bank withdrew these products twice in the past few years, and they're currently not on sale. The latest issue sold out after just a few months in 2011.

NS&I has now stated that it's unlikely to bring the savings certificates back before April 2013. That doesn't mean things will change next April either – it's just that they don't plan that far ahead.

The Government decides how much savings NS&I is allowed to attract in a given financial year and currently it doesn't want any more of our money to finance its ongoing borrowing needs. It's apparently cheaper for the Government to borrow elsewhere than for it to pay us more than the persistently high inflation.

What you could have got

Since 1980, if you had put your savings in these certificates and rolled them over to new ones as the years went by, you would have soundly defended yourself from inflation.

That's an impressive feat: today you need around £380 to pay for something that cost £100 in 1980. Most savers will have got nothing like that much.

On top of that, these certificates have given you extra gains, over and above inflation, averaging between 1.5% and 2% per year, leaving you closer to £500. Those “real” gains are extremely impressive for a savings product that has virtually no risk.

Consider what Warren Buffett, the world's greatest living investor, thinks. He reckons that if you're investing in much more risky shares you should be very happy if you manage to get 3% per year above inflation. That's after all investing and other costs.

Alternative inflation-beating products also withdrawn

A handful of other organisations have offered products that have guaranteed to beat inflation in the past couple of years.

BM Savings, part of Lloyds Banking Group, withdrew four such products from sale just a few days ago. It had two cash ISAs lasting three or five years and – of interest to non-taxpayers – it had two similar savings accounts as well.

BM Savings couldn't confirm to me if it would bring out another issue of the savings product soon.

Kent Reliance Building Society also had an inflation-beating cash ISA about a year ago, which quickly sold out. A spokesperson told me that it's interested in releasing a similar product again, but nothing has been signed off.

Last year, Yorkshire Building Society, and its two brands Chelsea Building Society and Barnsley Building Society, offered a cash ISA guaranteed to beat inflation too. The group has also been unable to confirm if it would like to bring back this deal.

Tesco Bank offered a couple of issues of an inflation-beating account too, although I didn't personally have a chance to check the small print. That leads me to an important point: beware that some inflation-linked savings products are not genuinely guaranteed to beat inflation under all scenarios, if you look under the bonnet.

Your choices

However, we know of one inflation-beating product that is available at this time. Santander offers an extremely secretive share ISA, the Santander Inflation Linked ISA (Issue 9). It's available until 5 June 2012, but only if it doesn't sell out first.

This is guaranteed to very slightly beat inflation. It ties your money in for six years and will pay the increase in retail prices, plus 1/20th of that gain on top. So if prices go up 30%, your money will go up 30% plus 1/20th of 30%, which means 31.5%. A £10,000 investment becomes £13,150, compared to inflation pushing prices to £13,000.

In the seemingly unlikely event that inflation doesn't rise much over the next six years, you'll still be paid a minimum return of 17%, making you at least £11,700 on your £10,000.

Since it's packaged as a share ISA, your allowance is also double that of a cash ISA, at £11,280 per person. The minimum investment in this ISA is £1,500.

This ISA is not publicised. There is no information about it on Santander's website. You need to go into a branch and specifically ask about the ISA in order to get it.

For non-taxpayers, Santander also offers a savings bond that will guarantee you beat inflation.

What if inflation falls?

It's interesting how many people are just interested in “winning” and not protecting their savings. That's why relatively few people use inflation-beating products but they're happy to take a chance on gold. It's also the reason many people choose long-term fixed rates instead of inflation-linked accounts.

I don't see the point in trying to play guessing games when you don't have to. If you've got your money in a savings product, you should just be happy to preserve what you've got. Most people don't come close. If you're in an inflation-beating product you will more than preserve your savings whether inflation falls or rises.

You're guaranteed to win. These accounts are worth watching out for.

More on saving and investing:

How to get higher investment returns with low risk

Peer-to-peer lending: we don't need the banks

The best supermarket financial products