SAVERS have been hit over the last couple of years by the double whammy of low interest rates and high inflation, which eats away at savings.

That’s why the re-launch of NS&I’s inflation-linked savings certificates is being so hyped.

They’re designed so that you can put away £100 to £15,000 for five years and it will pay the RPI rate of inflation plus 0.5 per cent.

As a government-owned bank, NS&I can pay the interest taxfree.

That means at the current 5.2 per cent inflation rate, a basicrate taxpayer would have to earn 7.1 per cent in a taxed savings account to beat it and a higherrate taxpayer 9.5 per cent – both of these are simply unachievable.

However, these products are meant to be for five years and over that time it’s likely inflation will drop, plus interest rates could go up, making this a poor deal.

But you can withdraw the money early. Do that during the first year and it won’t pay any interest, yet after a year and a day you’ll always get at least the rate of inflation for each whole month you put away the cash.

That’s because on each anniversary NS&I pays the rate of inflation, plus a fixed rate of interest. While it averages at RPI + 0.5 per cent, it’s deliberately tiered, so if you withdraw early you get a little less. In year one it’s RPI + 0.25 per cent, Year 2 +0.35 per cent, Year 3, +0.4 per cent, Year 4, +0.65 per cent, Year 5, +0.86 per cent. And if you withdraw part way through the year, you still get the interest pro-rata for each complete month the money has been deposited.

While many people question whether inflation will stay high over the next five years, most pundits agree it will stay high for most of the next year. If the rate of inflation does drop after that, you can then take your money out having had a decent rate of return.

While there’s a decent tranche available, NS&I said it’s limited, so don’t hang about.

In the event of deflation your savings won’t shrink. Then NS&I assumes inflation is zero, so you only get the fixed interest – 0.25 per cent in the first year. If you can’t afford to tie up your cash for at least a year, opt for the toppaying easy-access tax-free cash ISA that pays 3.3 per cent or top normal savings at three per cent. For more details see moneysavingexpert.com/savings

TV money guru Martin Lewis runs the consumer revenge website MoneySavingExpert.com
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