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Who is offering the account?
The Post Office Inflation Linked Bond is provided by the Bank of Ireland.
The last date for applications is 26th April 2011; unless it is oversubscribed sooner on which case the Bond will be withdrawn.
How is interest calculated?
Each year you will receive interest equal to RPI (Retail Price Index), measured in April each year, plus 1.50% gross / 1.46% AER.
If RPI were to be below 0% in any single year you would still receive 1.50% gross / 1.46% AER as a minimum rate of interest.
The graph below shows how the Bond may work. The annual rates used are for illustrative purposes only and are not an indication of the potential returns available.
From the date of your application until the start of the Bond on 26th May 2011 you will receive interest 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.
Is interest accumulated to my savings?
Yes, and it is paid at maturity.
How long do I have to tie my savings up for?
The bond has a term of five years and one day. The fixed term begins on 26th May 2011 and ends on 27th May 2016.
Can I get access to my savings?
Early closure is permitted in exceptional circumstances but will be subject to a ‘Breakage Charge’ which may result in a loss of capital.
How do I manage my account?
The Bond can only be applied for by post, the following documents are available, click on the document to download:
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. They can also call the Post Office on 0845 602 3409 to register for interest to be paid gross.
For tax payers interest will be paid with a deduction of 20% tax, higher rate tax payers will have an additional liability.
How are deposits protected?
The Inflation Linked Bond is provided by the Bank of Ireland. Deposits with the Bank of Ireland are protected by the UK Financial Services Compensation Scheme (FSCS) to the level of £85,000 per person, per institution.
More details about the FSCS can be found at www.fscs.org.uk or by calling them on 0800 678 1100.
What are the advantages of this account?
- The interest received by non taxpayers will be sufficient for the savings of non tax payers to keep pace with inflation
- Non taxpayers can apply to have the interest paid without the deduction of tax
- At the current level of RPI the net return for basic rate tax payers will sufficient to maintain the real value of their savings
- Deposits with the Bank of Ireland are covered by the FSCS
- Subject to the limits of the FSCS capital is guaranteed
- Interest is paid at maturity, which could be beneficial if you are in a lower tax band in 2016 that now
What are the disadvantages?
- Early withdrawals are allowed in exceptional circumstances; 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 higher rate tax payers will be less than inflation
The Investment Sense Verdict
As our best buy table shows this is account is one of only a handful currently available with interest linked to inflation.
On the face of it the offer sounds good, especially at a time of rising inflation, and the terms are better than the inflation linked account offered by Birmingham Midshires.
For non taxpayers and those who pay tax at 20% the Bond could be very attractive, especially if RPI continues to rise and interest rates stay low.
For higher rate taxpayers (40% & 50%) 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.
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.
