Leeds Building Society’s Inflation Buster Isa paying RPI plus 2.5 per cent.
What’s the deal?
A two-year cash Isa paying the inflation rate, as measured by the retail price index, plus 2.5 per cent. So, for example, were RPI to remain at 4.1 per cent, the Isa would pay an annual 6.6 per cent. Leeds Building Society is launching Issue 3 of this Inflation Buster Isa on Monday, which also accepts transfers in.
The inflation-linked return is based on RPI between January this year and January 2010. There is a lock-in of the inflation return after one year (April 30 2009), at which point savers can also encash or transfer out at no penalty. Otherwise, early encashments incur interest penalties. The Isa runs until April 30 2010.
Is this any good?
If inflation stays high over the next couple of years, this deal could prove a winner.
The current best Isa rates are just over 6 per cent: for Leeds’ Inflation Buster to match those, inflation would need to come in at 3.5 per cent or so. Last year, RPI averaged 4.3 per cent.
By definition, it also offers a guaranteed real return. While most tax-free cash Isas also beat inflation, their protection is not assured – and most normal savings accounts pay below RPI once taxed.
What’s more, it also pays a higher rate than National Savings Index-Linked Savings Certificates, which are also tax-free, but pay RPI plus 1.35 per cent.
What’s the risk?
Not huge, but RPI could drop and traditional savings rates might still prove higher. The bet for savers is about relative movements in RPI and saving rates.
With fears of rising inflation, an RPI-linked savings deal might seem attractive, especially at a time when base rates are on a downtrend.
However, inflation risks are also seen as limiting the scope for base rate cuts. And best buy savings rates remain high because of competition for funds as a result of the credit squeeze.
Were the Bank of England to raise rates again in the next two years to tame price rises, then a base rate-orientated return could beat an RPI–linked deal.
What are the alternatives?
For savers seeking certainty, Halifax was this week offering 6.2 per cent on a four-year fixed-rate Isa, while Nationwide’s one and two-year Isa bonds have been offering 6.15 per cent. This week also saw the launch of variable-rate deals as high as 6.5 per cent (Barclays Tax Haven Isa) or 6.25 per cent (Abbey).
How do I find out more?
Leeds’ Inflation Buster Isa (Issue 3) is available from Monday via branches, www.leedsbuildingsociety.co.uk or on 08450 540 995.
