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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 0.24% 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 0.98% per year gross AER.
If RPI were to be negative, also known as deflation, just the fixed amount would be paid.
The bond does not start until 23rd February 2012, savers will receive interest from the date of application until 23rd February 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 if inflation in the UK.
When calculating your interest The Post Office use the RPI figure published in January 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:
Each year the Post Office will write to savers to confirm the amount of interest added for the previous year.
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 £1,00,000.
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 5.2% in August, neither term will provide a return which beats RPI for both basic and higher rate taxpayers. Currently a basic rate tax payer would need a gross return of 6.5% per year to beat RPI, the five year bond, if inflation stayed constant at 5.2%, would provide a return of 6.18% over the first year
- If RPI continues to rise basic and higher rate taxpayers will see a return less than RPI because of the tax due
- If RPI falls it is possible that other accounts, with similar terms, will provide a better return and would not be available as the Post Office account allows no withdrawals
- 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
The headlines in the press have been positive for this account, for example the Daily Telegraph said “savers had been thrown a life line”, we are not so sure.
For non tax payers who want a return to beat inflation the Post Office Inflation Linked Bond is attractive.
But what about the majority of savers who are tax payers?
We don’t believe it is so attractive for this group. To start with current levels of inflation mean that the fixed interest payment is insufficient to make up for the tax which would be paid and inflation would have to fall significantly for this position to change.
Furthermore, if inflation does fall savers could be locked into the Post Office Inflation Linked Bond and unable to take advantage of other accounts which would pay a potentially higher rate of interest.
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?
A cautious thumbs up for non taxpayers who want an inflation linked return.
A thumbs down for everyone else, the Post Office Inflation Linked Bond is a poor imitation of the now sadly withdrawn National Savings Index Linked Certificates, which were tax free and allowed access.
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.
