How is interest calculated?
Interest will be equal to the RPI Annual Inflation Rate in the month of January; the figure is usually announced in February. Interest and will be paid on the Interest Payment Date, which is the anniversary of the start date of the bond.
In addition to the RPI linked payment a fixed rate of interest of 0.25% gross AER will also be paid.
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 if inflation in the UK.
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 bond has a term of 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 you received by non taxpayers will keep pace with inflation as measured by RPI
- 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 five year 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
- The interest rate received by tax payers will be less than inflation
- Interest is paid annually to a separate account meaning you will not benefit from compound interest
The Investment Sense Verdict
This is the only account currently available with interest linked to inflation. On the face of it the offer sounds good, especially at a time of rising inflation.
However take a moment to look closer, for tax payers the return is guaranteed to be below inflation and the term of five years, with no access to your savings, could be a significant drawback if inflation falls and interest rates rise.
For non tax payers of course the return, due to the additional 0.25% additional interest payable annually, will be above inflation.
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 firstname.lastname@example.org.