National Savings decision hits savers

THE unprecedented withdrawal of the inflation-beating products offered by National Savings & Investments has left savers facing a formidable challenge in securing real returns.

The government-backed NS&I this week pulled its index-linked certificates from general sale for the first time since they were introduced 35 years ago.

Some 588,000 people hold about 17 billion in the certificates and their withdrawal at a time of rock-bottom interest rates has intensified the savings crisis.

Andrew Hagger of Moneynet said: "While savers did not know exactly what return they were going to get from their index linked certificates, it was the certainty that they could protect their savings against inflation that made them so appealing."

For example, a saver who deposited 10,000 in a certificate for three years last June would now have a sum of 10,698, the equivalent of a 6.98 per cent tax-free return.

In comparison, the best three-year fixed-rate bond available in June 2009, the 4.35 per cent deal from ICICI Bank UK, would by now have turned 10,000 into 10,348, after basic rate tax, or 10,261 after higher rate tax.

And for savers looking for returns beating inflation, the pickings are now very slim.

A basic rate taxpayer would need a return before tax of 4 per cent to beat the current consumer prices index (CPI) measure of inflation of 3.2 per cent, while a higher rate taxpayer would need a rate of 5.3 per cent gross.

To beat the retail prices index measure, currently 5 per cent, basic and higher rate taxpayers need products paying 6.25 and 8.3 per cent gross. But the best rate currently available on a conventional cash account, a 4.75 per cent fixed-rate bond from ICICI, requires the capital to be tied up for five-years.

"The minimum term of investment to achieve 4 per cent gross is now three years, where you can get 4.15 per cent from ICICI Bank UK or 4.1 per cent from AA," said Hagger.

But for savers uncomfortable with putting their capital out of reach for such periods there are even fewer options, he added.

"With an instant-access account you can get up to 2.8 per cent with AA savings, including an initial 12 month bonus.

"But with rates at rock bottom it's more important than ever to check on your savings."