Index-linked savings products, which promise to maintain the spending power of money invested, differ widely in the way they calculate their returns, and can expose savers to more risk than they realise, FT Money research has found.
Last month’s rise in retail prices index (RPI) inflation to 5.6 per cent means that unless higher-rate taxpayers can find returns of more than 8 per cent they will lose money saved in real terms.
But those who expect inflation to remain high are being offered a range of products that link returns to price movements over a specific period of time.
The success of NS&I’s savings certificates, which offered compounded, tax free and 100 per cent guaranteed returns above the annual rise in RPI has led a number of other providers to enter the market.
The Post Office, in conjunction with Bank of Ireland, offers one of the most popular accounts now that NS&I has withdrawn its certificates. Savers can invest in three or five year index-linked bonds paying out 0.25 percentage points and 1 percentage point, respectively, above any annual increase in RPI.
Inflation is calculated in January each year. So if, for example, the five-year bond had been available last year and the inflation reading had been taken in September when it was 5.6 per cent, then the annual return for the first year would be 5.6 per cent plus 1 percentage point: 6.6 per cent.
Savers must invest at least £500 and interest will be paid out at maturity and is not compounded. If RPI falls in any particular year, then the annual return for that year will be the fixed rate of 0.25 or 1 per cent.
But competing index-linked savings accounts pay out a return based on the difference in the index between the date the account opened and a fixed date in 6 years time – rather than each year.
BM Solutions, part of Lloyds Banking Group, has three and five-year inflation-linked bonds that can be included in tax efficient wrappers and pay the difference in RPI plus 0.25 or 0.5 percentage points respectively.
Yorkshire Building Society has a six-year protected capital account that pays out the difference in RPI between September 2011 and September 2017 in a tax-free Isa. If the index falls then savers get the money they invested back. This investment is actually a structured deposit provided by Credit Suisse (Yorkshire BS is the deposit taker). Credit Suisse ran into trouble this week when the regulator fined it nearly £6m for failing to properly assess the risk appetite of customers to whom it sold other structured products.
However, Ian Lowes at comparestructuredproducts.com says that the difference between structured deposit accounts and structured products is important.
Because the bonds provided by BM Solutions, the Post Office and Yorkshire Building Society are deemed as savings, they are covered by the Financial Services Compensation Scheme (FSCS) – which means that if the institution fails, up to £85,000 of the money invested is protected.
Santander’s six-year index-linked Isa, on the other hand, pays out 105 per cent of the difference between RPI in November 2011 and November 2017, or 3 per cent if the index has fallen. But because it is deemed an investment rather than a savings account, money invested is not covered by the FSCS. The bank has a savings account offering the same deal outside of a tax efficient wrapper which is covered by the compensation scheme.
More complex index-linked investment products such as Incapital’s enhanced growth plan, a six-year structured product whose counterparty is Barclays Bank, are also not protected by the FSCS.
Incapital offers to pay out twice the rise in the FTSE 100 between now and November 2017, capped at a maximum gain of 70 per cent, or the rise in the retail prices index if it’s higher.
James Chu, managing director of Incapital Europe, says that the best hedge against inflation tends to be equity, but that the link to RPI offers an added level of security.
However if the FTSE 100 falls by more than 50 per cent then investors will not get all of their capital back.
As with any investment, savers need to consider the risks to their money, the length of the terms and what alternative returns are available elsewhere.
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