Savers cheer relaunch of Post Office inflation-busting bond

THE Post Office has delivered a timely boost for savers by launching a new issue of its inflation-linked bond just weeks after unprecedented demand forced it to withdraw the previous version.

The third issue of the popular product hits the market at a time when the value of savings held on deposit is being ravaged by rising prices.

Just a tiny handful of savings accounts offer returns above inflation and the withdrawal of the previous Post Office bond last month came just after NS&I pulled its tax-free inflation-beating savings certificate off the shelves.

The new product is officially available until 20 January, but the Post Office warned that it could be withdrawn before then if demand is too heavy.

The product offers savers a choice of three- or five-year fixed terms. The three-year term pay out 0.25 per cent above the retail prices index (RPI) measure of inflation, while the five-year term offers RPI plus 1 per cent gross, both paid at maturity. The returns are slimmer than offered on the previous products, which paid RPI plus 0.5 and 1.5 per cent over three and five years respectively.

The return is based on the January level of RPI. Based on the most recent RPI level of 5.2 per cent, savers would get a return of 6.2 per cent for the first year of the five-year term or 5.45 per cent from the three-year version. The returns are taxable, unlike those from the NS&I products.

Savers can open the product with a minimum deposit of £500, but the money is then tied up for the full term. If it is taken out before maturity, no interest is paid and a penalty could be charged on early withdrawal. The fixed terms start on 23 February next year, with the money held in a Post Office account paying 2.5 per cent until then.

Richard Norman, director of savings and investments at the Post Office, said: “Since we launched the first inflation-linked bond earlier this year, inflation has remained high, leaving savers worried about the value of their hard-earned cash. This new issue of the inflation-linked bond offers them another chance to get peace of mind that their savings will be protected against the eroding effects of inflation.”

But Andrew Hagger, head of communications at Moneynet, warned savers against piling all their money into the bonds.

He said: “Both the three- and five-year bonds look attractive, but with some experts predicting that inflation will peak before the end of this year they may not be the best option in the long term.

“If inflation falls and interest rates on fixed-rate bonds remain stable, the latter may prove a better option. It may be worth sheltering some of your cash in these inflation-proof products but I wouldn’t put all my eggs in this basket.”

Hagger’s warning came as thousands of fixed-rate bonds approach maturity. October and November have been the peak periods for fixed-rate bond business since the financial crisis unfolded, and savers have been urged to find a new deal once their existing one expires.

Kevin Mountford, head of banking at Moneysupermarket.com, said many savers would be automatically switched into inferior products unless they take action.

“With the products on offer this autumn even more competitive than last, consumers looking to move savings should act now to take advantage of strong rates,” he said.