Changes to NS&I inflation-linked accounts come in: what should savers do?
From today, half a million savers with NS&I index-linked certificates will see their returns fall when they come to renewal – should they move their cash?
From 1 May, interest paid on index-linked certificates issued by National Savings & Investments will be based on the consumer prices index rather than the retail prices index.
The move is a major blow for the 507,000 savers who hold these certificates because CPI is generally lower than RPI so they’re likely to receive a lower return.
Over the past 10 years, £10,000 that kept pace with RPI would be worth £13,113 but only £12,520 if it had tracked CPI.
Index-linked certificates have not been on general sale since 2011 but people who have existing certificates can renew them at maturity and opt for a 2, 3- or 5-year term.
They currently offer 0.01% plus RPI, which is 2.4%, but from 1 May they’ll pay 0.01% plus CPI, which is 1.9%.
Hargreaves Lansdown says tracking CPI instead of RPI will cut interest payments by £610m over the next five years.
Stick or switch?
If you have index-linked certificates maturing on or after 1 May, you may be weighing up whether it’s worth sticking with them or looking for a more rewarding alternative.
They have certainly become less generous, but it’s important to remember they still have benefits that other savings products can’t offer.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “Just because your long-term partner isn’t quite the catch it once was, it doesn’t necessarily mean you should kick it out because they don’t make tax-free inflation-beating savings accounts like them anymore.
“While you might hanker for the heightened interest of the early days, this slightly less impressive version of your long-term partner is still worth sticking with.
“These certificates are still essential tools for savers, because they guarantee to beat inflation, and are 100% backed by the government, so offer real reassurance in a portfolio.”
Having said that, if you’re prepared to forgo the guaranteed protection, there are some far better options for savers over 2, 3 and 5 years.
For the best two-year bonds, sharia-compliant Al Rayan pays 2.42% and BLME pays 2.35% (minimum deposit £1,000).
The best three-year options are 2.55% from Gatehouse Bank, 2.53% from Al Rayan and 2.4% from Tandem Bank.
The highest five-year rates are 2.75% from Gatehouse Bank, 2.70% from BLME and 2.6% from Secure Trust Bank.
While these rates are clearly more attractive, interest isn’t automatically tax free like it is with NS&I products.
This is important to consider if you’re earning more than or approaching your personal savings allowance. Basic rate taxpayers can earn £1,000 of interest tax free, while higher rate taxpayers can earn £500. Additional rate taxpayers do not get a personal savings allowance.
Anna Bowes of Savings Champion says: “Those who are lucky enough to already hold index-linked certificates should think very carefully before encashing as once they have done so, they may not get the opportunity to have any more in the future.
“While the government inflation target is 2% there is no way of knowing exactly what will happen to CPI going forward.”