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Inflation linked savings
Rachel Thrussell, Head of Savings at Moneyfacts.co.uk, comments:
“The Monetary Policy Committee (MPC) is currently trying to balance the scales between inflation and base rate. With increasing costs on fuel and food, inflation has grown to 3.3% (CPI) in May 2008, its highest level since July 1992 and well above the Government’s 2% target.
“With inflation currently increasing from month to month, many may think that an inflation linked savings product is a good investment, but typically there are catches.
“Currently there are four products on the market which are linked to inflation:
- Leeds BS Inflation Buster ISA Issue 5 (31.7.10)
- Leeds BS Inflation Buster Bond Issue 8 (31.7.10)
- NS&I Index-Linked Certificate 18th (3 year term)
- NS&I Index-Linked Certificate 45th (5 year term)
“These products are linked to RPI and pay up to 2.5% above this rate. Currently RPI stands at 4.3%, but anyone hoping to get 6.8% on their savings is going to be sorely disappointed.
“Both of the Leeds BS’ products pay 2.5% above inflation. However, the rate of inflation paid is the rate of RPI on 30 April 2009 in year one and 30 April 2010 in year two. By then the MPC should have brought inflation under control and the rate you actually receive could potentially be lower than that on market leading accounts.
“The NS&I products pay 1% above RPI, with interest paid on maturity. If the certificate is repaid in the first year, no interest or index linking is paid. If repaid after the first year but before the end of the term, a reduced rate is paid. However, the NS&I products do guarantee that your savings will not be eroded by inflation.
“Although these products may seem a good deal at the moment, rates at a much higher level can be found elsewhere. Before opting for any savings product, make sure you are getting the best rate of return from one that suits your needs.”
Moneyfacts is the UK’s leading independent provider of personal financial information and our data is used and trusted throughout the financial industry.
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