HomeHow is interest calculated? 
There are two versions of this account, one which runs for three years and another which has a five year term.
The interest you receive is made up of two parts. Firstly you will receive an interest payment equal to the RPI Annual Inflation Rate in the month of April each year; the figure is usually announced in May.
In addition to the RPI linked payment the three year bond will receive an additional payment of 0.75% gross AER each year and the five year bond will receive an additional 1.50% gross AER.
Interest will be paid on the anniversary of the start date of the bond.
What is RPI?
RPI stands for the Retail Price Index and is measure of the level of prices of goods and services bought by UK households.
The RPI figure is compiled by the ONS (Office for National Statistics) and along with the CPI (Consumer Price Index) is one of the most popular measures of inflation in the UK. RPI differs from CPI as it includes the cost of mortgage borrowing.
Is interest accumulated to my savings?
No, interest is paid annually to a separate account nominated by you.
How long do I have to tie my savings up for?
The bonds have a term of three or five years.
Can I get access to my savings?
You can change your mind within 14 days of opening the account and receive a refund of your investment.
However after 14 days, no withdrawals can be made.
The only exception to this rule is on the death of the account holder, when the account will be closed without charge and any outstanding interest due will be paid.
How do I manage my account?
You can apply for an account by telephone, once opened the account is managed by phone and using the postal system.
How much can I save?
The minimum amount you can deposit is £500, the maximum is £1million.
How is the interest taxed?
The bond is not available as an ISA (Individual Savings Account).
Non taxpayers can complete an R85 form and apply to have the interest paid gross, without the deduction of tax.
For tax payers interest will be paid with a deduction of 20% tax, higher rate tax payers will have an additional liability.
What are the advantages of this account?
- The interest received by non taxpayers will keep pace with inflation as measured by RPI
- At current levels of RPI basic rate tax payers will receive a net of tax return which is above inflation
- Non taxpayers can apply to have the interest paid without the deduction of tax
What are the disadvantages?
- No early withdrawals are allowed; therefore if RPI falls over the term and interest rates rise you will not be able to move your money to a different account potentially paying a higher rate of interest
- The bond is not available via an ISA
- For all tax payers the interest rate received on the three year version will be less than inflation
- For higher rate tax payers the interest rate received on the five year version will be less than inflation
- Interest is paid annually to a separate account meaning you will not benefit from compound interest
The Investment Sense view
There are very few accounts, we know of two, where interest is linked to inflation.
The new five year offering from Birmingham Midshires is an improvement on the terms offered previously when the additional payment on was 0.25%, it is now 1.50%, which represents a significant improvement.
The introduction of a three year bond is good news for those people who don’t want to tie their savings up for five years.
The previous issue meant that for tax payers the return was guaranteed to be below RPI. However with RPI standing at 5.5% the additional payment of 1.50% is sufficient to mean that for basic rate taxpayers the net, after tax return, is sufficient to keep pace with RPI. It also significantly beats CPI.
However, if RPI continues to rise the additional payment of 1.50% may not be sufficient to provide an after tax return which beats RPI.
The three year bond does not currently provide a return which beats RPI for anyone other than non taxpayers.
In addition the terms of three and five years, with no access to your savings, could be a significant drawback if inflation falls and interest rates rise.
The three year bond should be attractive to non taxpayers who want to beat inflation. The five year bond will be useful for non and basic rate taxpayers alike who simply want to get a return which currently beats inflation. However tying money up for five years in the account could have significant drawbacks if inflation falls and interest rates rise.
Should you wish to discuss this account, or other ways of getting a real, above inflation, return on your savings, speak to one of our team of advisers today. They can be contacted on 0115 933 8433, 0845 078 7774 or by sending an email to info@investmentsense.co.uk.
