While rising inflation has devastated savers’ savings in recent years, a lucky group has not been affected.
They are holders of National Savings and Investment Indexed Savings Certificates.
What makes these savings accounts special is that they promise to always beat inflation, even if only by 0.01 percentage point.
As inflation soared to 11.1 percent at the end of 2022, they paid out as much as 11.11 percent to bondholders.
Maximum returns: National Savings and Investments’ index-linked savings certificates promise to always beat inflation, but only by 0.01 of a percentage point
But with inflation back down to 2 percent, these accounts pay less than half of what savers could receive in higher-yielding fixed-term bonds.
The question then is: should savers hold on to them or get rid of them?
Indexed Savings Certificates are available for two, three or five year terms. They are no longer for sale, but holders can renew them for another term when they mature.
Deciding to renew was an easy decision two years ago. Inflation was at 9.4%, while the highest two-year bond yielded 2.8%.
The certificates were paying 9.41 per cent. A sum of £10,000 worth of certificates maturing today will be worth £11,095, which equates to a healthy 5.44 per cent tax-free per annum. That is the same average interest rate over the two-year period.
An equal amount saved in a three-year bond maturing now offers an even better return of £12,102, a solid 7 per cent.
Over five years the yield is lower but still tax-free at 4.8 per cent, so your £10,000 would be worth £12,440 if it matured today.
But the decision is now more complicated. Interest rates have soared: Close Brothers and Cynergy Bank’s two-year bonds are paying 5.06 percent.
Three-year bonds pay up to 4.81 percent (United Trust Bank and Cynergy Bank). All look much better than the 2.01 percent offered by certificates.
Recent changes in the rules have also made things more complicated. It is no longer possible to withdraw money during the term of certificates renewed since July last year.
But if you don’t renew, you’ll lose the benefit of having this single account (and it still has advantages).
If inflation does rise again, those with protection will be very lucky. The interest is also tax-free and adds to your ISA cash allowance or any premium bonuses you get.
If you have these certificates, I would be tempted to keep them, but only if you are willing to tie up your money.
The best building society rates for members
Building societies are stepping up their efforts to reward their members with the best savings rates.
Nationwide has an 18-month bond that pays a fixed rate of 5.5 percent. You can open it if you were a member on May 22 and are still a member today.
You can deposit up to £10,000, which will earn you £840 in interest at the end of the term.
However, the company does not offer a tax-free cash ISA version. It only has a one-year account with a lower rate of 4.5 per cent.
Skipton Building Society has a one-year members’ bonus at 5 per cent, fixed until 7 August 2025.
You are eligible if you have been a member since June 12 or before and do not hold a previous issue of the bond.
It also has a regular member savings programme with a fixed rate of 7 per cent for 12 months for savings of up to £250 a month, available if you became a member on or before 11 January.