17 May 2011

Inflation-linked National Savings Certificates are back

They haven't been available for a while and reports say they may not be on offer for all that long. But that doesn't necessarily mean they are a good thing to go for.

They give you a tax-free return of RPI + 0.5%. And you can hold up to £15,000. The fact that they are linked to the RPI inflation index rather than the lower CPI (which would have given a lower return) is a good thing.

They may be particularly tempting for people who appreciate the Savings Dilemma - that the returns they are getting on savings at the moment are unlikely to keep up with inflation - so they are effectively losing value. So to have something linked to the rate of inflation has got to be a good thing - hasn't it?

The problem comes from the fact that these are five year investments, and that inflation may well peak in the next year and then fall (although no-one including the Bank of England has been good at predicting inflation). If general savings rates improve within five years then you would find yourself stuck in the back row, and linking to inflation may not be such a clever move.

But if a safety net or back-stop to cover a worst-case scenario is what you need in your portfolio, then they could be a good option.

It all goes to show that there are no easy answers at the moment.

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