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How is interest calculated?
You have two options, a three year term and a five year and one day term (for ease we will refer to this from now on as a five year term).
The three year bond pays interest each year equal to the annual RPI inflation rate plus 0.25% gross AER. The five year bond also pays interest each year equal to the annual RPI inflation rate but pays a larger fixed amount of 0.49% per year gross AER.
If RPI was to be negative, also known as deflation, just the fixed amount would be paid.
The bond does not start until 27th April 2012, savers will receive interest from the date of application until 27th April 2012 equivalent to 2.50% gross AER.
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.
When calculating your interest The Post Office uses the RPI figure published in March each year.
Is interest accumulated to my savings?
Yes, for both terms interest is paid at maturity.
How long do I have to tie my savings up for?
Depending on the bond you choose to invest in either three years or five years and one day
Can I get access to my savings?
The Post Office Savings website states “no withdrawals (are allowed) during the fixed term”, however under “exceptional circumstances” early closure is allowed although this is subject to a breakage charge which could mean a saver receives less back than they had invested.
How do I manage my account?
The account is opened by post; documents can be downloaded from the following links:
How much can I save?
Only one lump sum can be deposited, no additional savings are allowed.
The minimum investment is £500, the maximum is £1,000,000.
How is the interest taxed?
Interest is subject to tax at your highest marginal rate.
20% will be deducted at source, except for investments of over £50,000 on the three year bond, where no tax will be deducted and you will need to account for all tax due. On accounts where tax is deducted at 20% higher rate tax payers will need to pay additional tax.
Non taxpayers can apply to have interest paid gross, i.e. without the deduction of tax, by completing the relevant R85 form.
What are the advantages of this account?
- The Post Office Inflation Linked Bond is provided by the Bank of Ireland who are members of the UK Financial Services Compensation Scheme (FSCS)
- The minimum investment is low at just £500 making the account accessible to most savers
- For non tax payers the account will provide a return guaranteed to be above inflation
What are the disadvantages?
- At the current level of RPI, which was 3.9% in January 2012, neither term will provide a return which beats RPI for both basic and higher rate taxpayers
- If RPI continues to fall it is possible that other accounts, with similar terms, will provide a better return. However as the Post Office Inflation Linked Bond allows no withdrawals it would not be possible to move savings from one account to another
- The account is not available as an ISA (Individual Savings Account) which would have sheltered some of the interest from tax
- No withdrawals can be made from the account, although this is typical with such a savings product
The Investment Sense Verdict
It all depends where inflation is heading.
The dilemma for savers is whether to lock money into an account where returns are linked to inflation at a time when it is falling
There are some attractive fixed rate bonds currently available that could prove to be a better long term alternative if inflation does continue to fall over the next few years, clearly inflation could start to rise again making inflation linked accounts more attractive.
On another note it would have been nice to see the account launched as an ISA to at least protect some of the interest from tax.
Our verdict?
It depends on where inflation heads over the next three or five years. Whilst short term trends may be reasonably predictable, over three to five years it becomes harder. On balance we therefore prefer the flexibility offered by shorter term fixed rates rather than locking into longer term accounts linked to inflation.
Should you wish to discuss this account, or 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.
