Deal of the week: National Counties Building Society cash Isa

What’s the deal?

A three-year cash Isa from National Counties Building Society paying the equivalent of inflation – measured by RPI – plus 2.6 per cent annually.

The tax-free return equates to an annualised 7 per cent, assuming this week’s 4.6 per cent increase in the retail price index (RPI) continued for three years, says the society.

The 1st Issue Index Linked Cash Isa is available for new savings as well as transfers of existing Isas from the society or other institutions. The minimum investment is £1,000.

The inflation return is measured by the change in the RPI from October 1 to September 30, 2011. Before that, savings earn interest of 6.75 per cent tax-free.

Why should I invest?

The account guarantees to beat inflation over the three-year term and offers potentially market-leading returns if RPI stays high. By contrast, most taxed savings accounts and even some tax-free Isas aren’t giving a real return at present.

The society suggests the account could offer an alternative to the certainty of locking in to fixed rates, which could prove less competitive if rates rise.

Fixed-rate Isas currently pay up to 6.5 per cent, while the best instant access Isas are offering just over 6 per cent.

The account also makes savers a member of the society and therefore in line for any windfall that could emerge from a future merger of National Counties into a bigger organisation.

What’s the catch?

The account’s returns don’t come from locking in to today’s high inflation rate but future price rises over a three-year period starting in October. While inflation is expected to rise higher still, it could then come down again over the three-year investment period. This would moderate the overall return.

And while deflation may seem an unlikely prospect, were RPI to be negative over the total investment term, savers would be left with a rate of just 2.6 per cent for each of the three years.

Savers are also effectively tied in for the full term. Closure or transfer out before maturity comes at the expense of the inflation element of the return, meaning that savers would only earn the basic 2.6 per cent.

What are the alternatives?

Leeds Building Society’s similar Inflation Buster Isa pays RPI plus 2.5 per cent and has a two-year term. Leeds’ savers also have an option to transfer out on the one-year anniversary without penalty.

National Savings’ Index-linked Certificates offer tax-free returns of RPI plus 1 per cent over three or five year terms.

How do I find out more? or 0845 603 4876. National Counties is also writing to existing savers.

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