Wednesday, 23 March 2011

BM Savings Inflation-Linked Bond (UK)

Fixed rate savings form part of Level 3 of the DIY Income Investor's Income Pyramid
 
Savings bonds with a return linked to inflation may help to maintain the purchasing power of your savings. For UK savers, since the withdrawal of National Savings & Investments' index-linked certificates in July 2010, there have been few index-linked options (although the recent 2011 Budget announcement means that they will be back.
 
However, does the new inflation-linked bond from BM Savings fit the bill?
 
BM Savings Inflation-Linked Bond 
 
BM Savings has launched a new inflation-linked bond paying 1.5% plus the annual April measurement on the retail prices index (RPI) for 5 years. A shorter, three-year option is also available paying a slightly reduced 0.75% plus RPI annually.
 
Savers will need to sign up before 16 May 2011. On 1 June 2011 savers will receive 0.5% on the invested amount. For the next year (i.e. the 12 months from June 2011) they will receive April 2012's rate of RPI plus 1.5% (or 0.75%, depending on term length) on the following 1 June, and so on. So the rate of return depends on the RPI at the end of the year.
 
The minimum deposit is £500 and interest is paid into a separate current or savings account on 1 June each year. Withdrawals are not permitted.
 
Is is a good idea?
 
That depends on your view of inflation.
 
The RPI index (which includes housing costs) has averaged around 2.8% since 2000. However, it rose to 5.3% in April 2010, dipped briefly at 4.5% in October 2010 and hit 5.5% in February 2011. Economists expect further increases in the coming months, although the Bank of England expects inflation to drop rapidly in early 2012 after hitting a peak in summer 2011. In fact, the Bank of England is going to have to take action soon on inflation - by increasing the base bank rate.

If RPI fell back to 3% in April 2012 (as seems likely), a non-taxpayer would receive (3+1.5) = 4.5%. Yet there are several savings accounts already offering 5% return fixed for 5 years.

So the answer seems to be that this is one to leave:
  • it is a complicated investment to assess, with a variable rate of return - already a 'black mark' for the DIY Income Investor
  • inflation is likely to come down
  • better fixed rates are available

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.