HomeWho provides the account?
The Inflation Linked Bond 2 is provided by the Bank of Ireland who are members of the UK Financial Services Compensation Scheme (FSCS).
How is interest calculated?
There are two versions of the Inflation Linked Bond, the first with a three year term and the second with a five year term.
If you save for three years the interest is annual RPI inflation rate plus 0.50% gross / 0.49% AER fixed each year.
If you save for five years the interest is annual RPI inflation rate plus 1.50% gross / 1.46% AER fixed each year.
If RPI is ever negative you will still receive the additional fixed payment, although you will receive nothing in respect of RPI.
The Post Office use the RPI figure for August each year to determine the interest you will receive. The August inflation figure is published by the Office for National Statistics (ONS) in September each year.
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?
Yes and paid to you along with your capital at maturity.
How long do I have to tie my savings up for?
Three or five years depending on the term that you choose.
Can I get access to my savings?
No, you cannot access your savings during the three or five year term. Although the Post Office do say that early closure is possible in “exceptional circumstances” and would be “subject to a Breakage Charge, meaning you could get back less than your original investment”.
How do I manage my account?
You can open an account by completing the application form and sending it to the Post Office or by calling them on 0800 169 7500.
The Post Office will write to you each year to confirm the amount of interest that has been added to your account.
How much can I save?
The minimum amount you can save is £500, the maximum is £1,000,000.
No additional payments can be made to the account after the initial deposit.
How is the interest taxed?
Interest is subject to income tax.
Non taxpayers can apply to have the interest paid gross without the deduction of tax.
If you invest in the five year bond, tax will be deducted before interest is paid to you.
If you invest in the three year bond, tax will be deducted from the interest for balances below £50,000. For balances above £50,000 interest will be paid without the deduction of tax and you will be responsible for ensuring that you pay the correct amount of income tax due yourself.
What are the advantages of this account?
- The interest 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
- Deposits are protected by the FSCS, subject to the limits of the scheme
- The minimum investment is relatively low at £500
What are the disadvantages?
- No withdrawals can be made during the term
- At current levels of inflation, the returns will not keep pace with inflation for basic and higher rate taxpayers
- Unless you are a non taxpayer, tax is payable on the interest
- If inflation falls, the return you get will fall and your money will be locked in to the account meaning you would not be able to take advantage of other accounts which would potentially pay a higher rate of return
The Investment Sense Verdict
The new Post Office Inflation Linked Bond is competing directly with National Savings & Investments (NS&I) Index Linked certificates. The question is do they offer a better alternative?
For a non taxpayer willing to tie money up for five years with no access whatsoever, the Post Office account probably does represent a more attractive deal as the payment in excess of RPI is 1.50% not 0.50%.
However, for taxpayers, the additional 1% interest payable on the five year bond is insufficient to offset the effects of the tax which would be payable on the interest.
Then there is the issue of access. The NS&I Index Linked Certificates can be accessed during the five year term and providing they are held for at least one year, interest is still credited. The Post Office Inflation Linked Bond cannot be cashed in or surrendered during the term. Savers therefore must be sure that they can give up access to their savings for the duration of the account; three or five years.
The Post Office Bond allows investments above the £15,000 maximum level allowed by NS&I’s Index linked Certificates, which for some could be an advantage.
In summary, if you are a non taxpayer the new Post Office Inflation Linked Bond could be a viable alternative to NS&I Index Linked Certificates, if you can tie your money up.
For taxpayers however, the Index Linked Certificates would seem to offer a better home.
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.
