Find out how some savers are earning 5.5% on their savings, tax-free - without using up any of their ISA allowance.
The news earlier this week that RPI inflation is 5% no doubt made many savers want to weep.
It means that, if you want to stop your money from deteriorating in value, you now need to find an account that pays 6.25% if you’re a basic rate taxpayer and 8.33% if you’re a higher rate taxpayer.
Unfortunately, the best online easy access savings account – the Coventry Building Society Poppy Online Saver account – pays just 3.1%.
Believe it or not, you may actually better off sticking your savings in a current account like the Santander Preferred In-credit Bank Account. You can earn as much as 5%, and still have instant access to your money.
The catch is, you must transfer over all your direct debits. You also have to deposit at least £1,000 a month. Of course, you can instantly withdraw this money - or, if you’re really clever, send it to back and forth between another account every month, via a standing order.
The rates on this account is fixed but only for 12 months, so make sure you review the account after a year.
Now, you might think that sounds like a super deal. But taxpayers will still lose out after inflation with this account.
Luckily, if you don’t need instant access to your cash, there’s an even better account out there - and it has long been my favourite savings account:
The NS&I Index-Linked Savings Certificate
OK, so it doesn’t sound very sexy. But it is. In fact, it’s so sexy, Right Said Fred should write a song about it.*
This account pays - wait for it - 0.5% above the RPI (a measure of inflation), TAX-FREE.
This is a fantastic return when you consider that RPI is currently 5%. And this is not an ISA and so putting savings in this account won’t affect your ISA allowance. In other words, you can save tax-free in this account in addition to saving tax-free in your ISA.
How can NS&I get away with offering a special tax-free account like this? Because NS&I is owned by HM Treasury - which means 100% of your savings are guaranteed by the British Government.
NS&I is the safest place in the UK to put your money and there’s no need to worry about the FSCS compensation cap. You can save as much money as you like with NS&I and your money will be as safe as the crown jewels. Literally.
A word of warning
These certificates are designed to enable you to beat inflation by 0.5% over the period your money is invested.
If inflation falls over or stays level during the next year, you are still guaranteed to beat inflation by 0.5%, but you will not earn 5.5% unfortunately.
It's a complicated calculation which I've explained in more detail below, but the key thing to bear in mind is that you are guaranteed a tax-free, inflation-busting return. If you are happy with that guarantee (or worried that inflation will rise), then go ahead and get it. But it is impossible to say whether this certificate will continue to pay out the highest rate available to taxpayers.
Locked up for five years
There is currently only one type of index-linked savings certificate you can get: a five-year bond. The good news is, you can decide to lock your money away in this bond and then change your mind at any time and access your money. However, you will face an interest penalty, so if you think this is likely to happen, this account may not be the best option for you.
Here’s how it works out:
Lock money away for...
Access money before 1st year anniversary:
Access money after 1st anniversary
RPI + 0.5% (currently 5.5% tax-free)
Bond pays no interest at all - you simply get back the sum you put in
Year 1) Purchase price + index-linking for year 1+ 0.25% of purchase price
Year 2) 1st anniversary value + index-linking for year 2 + 0.35% of 1st anniversary value
Year 3) 2nd anniversary value + index-linking for year 3 + 0.40% of 2nd anniversary value
Year 4) 3rd anniversary value + index-linking for year 4 + 0.65% of 3rd anniversary value
Year 5) 4th anniversary value + index-linking for year 5 + 0.86% of 4th anniversary value
As you can see, in contrast to most fixed rate bonds, the interest penalty you pay for early access is relatively small. As long as you have left your money in the bond for a year, you will still benefit from tax-free index-linking, plus a small return.
Just another reason why I really like this product!
There are always a few, aren’t there?
First point is that you have to invest at least £100 and you cannot invest more than £15,000 in each issue of each type of certificate right now. However, each time a new issue of the certificate goes on sale, you can invest another £15,000.
In the event of a decrease in the RPI over the period of time your money has been invested, NS&I promise that the maturity value of your bond will never be less than the preceding anniversary value or, if your money is invested for less than a year, the purchase price. So instead of getting RPI +0.5%, RPI will be deemed zero, but you will still get +0.5% interest on your savings.
Finally, bear in mind that NS&I works out index-linking by using the RPI figures applicable at the start and end of each year of an investment. So if you invest now, and inflation falls over the next year, your return will fall as well. But at least the ‘real’ value of your money will remain the same.
Ultimately, this bond is best suited to savers who would like the peace of mind that comes with a safe, guaranteed real return on a long-term investment. Personally, I have been a fan of these savings certificates for years and have even recommended it to my own father, who as a pensioner needs all the help he can get to beat inflation.
So that's what I think. But how about you? Have you ever taken out one of these bonds? Share your experiences using the comments box below!
Show me some calculations
I know some of you find working out the rate on these certificates a bit confusing so you will be pleased to hear NS&I has addressed your concerns and written this article for us: How NS&I index-inked savings bonds really work. Please read it and let us know your thoughts! Read the article
*I'm too sexy for this savings certificate, too sexy for this certificate, so sexy I want to pontificate (about this sexy certificate)...
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