NS&I’s popular index-linked savings certificates will change from May 1st for existing customers who reinvest. In the future, they’ll track the lower measure of inflation, the CPI. It will mean lower returns – so are they still worth it?
Index-linked savings certificates explained
The way NS&I’s index-linked savings certificates works is that you get a return based on the inflation rate. The inflation rate is measured (and often changes) every month. If the inflation rate increases, so does your return. The return on index-linked savings certificates, is tax free and these certificates run for a fixed term of two, three or five years. As I write this, index-linked savings certificates pay out whatever the inflation rate is plus 0.01%.
SAVVY TIP: Your money is not invested so it’s not risky in the way that investing in the stock market can be. Also, 100% of your cash is backed by the Treasury.
Up until May 1st, index-linked savings certificates produce a return based on the RPI, the retail prices index. However, for savings certificates that mature on or after May 1st, if you reinvest your money, the return will be based on the consumer prices index, or CPI. The CPI measure of inflation is invariably lower than RPI, and can be much lower.
Who can save in index-linked savings certificates?
Index-linked savings certificates have been very popular with savers over the years. However, NS&I closed them to new customers in 2011. But anyone who already had money in these certificates has been able to reinvest their money (including any interest they’ve earned).
You can reinvest your money in index-linked certificates that last for two, three years or five years. If you prefer, you can cash them in.
SAVVY TIP: If you have an index-linked savings certificate, you can choose to reinvest it in the same certificate (i.e. the same length of time) or you can switch to a longer or shorter term. However, you can only reinvest your money in a two-year index-linked savings certificate if you already have your money in a two-year one. You can’t switch from a three-year certificate to a two-year one, but you can switch the other way round (phew!).
The first thing to say is that the change from tracking RPI inflation to CPI won’t affect index-linked savings certificates until they mature and you choose to reinvest your money in another certificate. It will not automatically kick in on May 1st if the term on your savings certificates isn’t up yet.
What difference will it make?
The CPI rate is generally lower – sometimes significantly lower – than the RPI rate of inflation. As I write this, the CPI was 2.1% in December, whereas the RPI was 2.7%. The table below shows the effect of tracking the CPI rate of inflation rather than RPI, based on December’s inflation figures.
|£1,000 investment||Interest earned RPI||Interest earned CPI|
|2yr index linked certificates||£54.93||£40.60|
|3yr index linked certificates||£83.52||£61.51|
|5yr index linked certificates||£143.05||£104.62|
Should you move your money?
The unhelpful answer is that it depends. If you want to be sure that your cash will beat inflation, it may be worth reinvesting your money in another index-linked certificate.
However, you can do better by putting your money into a two or three year fixed-rate savings account. Currently, best buys are paying 2.3% and 2.4% respectively. You can find out all the best buys on the Savings Champion website.
Savings accounts explained – how variable, fixed rate and notice accounts work
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