A small building society today launched a tax-free savings account which guarantees to beat inflation.
National Counties Building Society (NCBS) is offering a five-year Isa that pays annual interest of 1% plus the change in inflation, which is the measure of the rise in the cost of living, over that period as measured by the Retail Prices Index (RPI).
Based on the current 5% annual RPI inflation, that's a 5.82% annual rate, according to NCBS.
If you take the account, called the 2nd Issue Index Linked Cash Isa, your money is locked away for the term unless you pay a hefty penalty (see the Top Savings, Cash Isas and Isa Transfers guides).
The group is the only savings provider to offer consumers an account with an inflation guarantee after the government-backed National Savings and Investments pulled all of its index-linked products last month.
The current combination of high inflation and record low interest rates has left savers struggling to make a real return on their money once tax and inflation are taken into account.
How it works
- You are paid the rise in RPI over the five years plus 1% (see below for breakdown).
- You must open the account and deposit a minimum £5,100 by 30 September (though the account may close earlier if over-subscribed). The maximum you can save in any cash Isa is £5,100 a year.
- The balance can be made up of new cash Isa money or cash transferred from old Isa accounts, or a mixture of the two (see the Isa Transfers guide).
- You can top-up your balance but only until the account is closed to new cash (30 September at the latest).
- The 1% interest is paid from account opening but the RPI interest only starts accruing from 1 October.
- If RPI is negative over the term (ie, prices drop during that time) you will just be paid 1% annual interest.
- You cannot make a withdrawal but you can close the account at any time and take your cash, though you will only earn the 1% fixed interest, not any RPI-related interest.
How exactly is interest calculated?
- RPI interest. This is paid on account maturity on 1 October 2015. It is based on the difference in the RPI index between July 2010 and July 2015. In plain English, this means you'll get, in percentage terms, the typical rise in the cost of living between those dates.
Say, in that time, the index rose by 25% and you started with a £5,100 balance, you'd be paid £1,275 interest (25% of £5,100).
RPI is usually expressed as an annual figure – for instance the current 5% figure shows the difference in prices (therefore the difference in the index) between June 2009 and June 2010 – but in this case NCBS is using the difference over five years.
- Extra 1% interest. This is an annual figure so accrues every year.
The RPI interest paid is purely on the balance on 1 October, not anything earned from the separate 1% fixed interest.
Similarly, the 1% interest is paid solely on your deposit, not any RPI-related interest, though it starts accruing the moment you have cash in the account.
Is the account any good?
Unlike any other savings account on the market it is guaranteed to beat inflation over the term.
Every other standard account fails to beat RPI inflation. Remember, the present 5% rate tracks prices over the previous year whereas anyone opening an account today wants their cash to grow faster than inflation in future years.
However, your money is locked in for five years, unless you pay the interest penalty. Also, interest rates may rise in that time and inflation may fall, meaning you'd be better off elsewhere.
Further reading/Key links
Top deals: Top Savings, Cash Isas, Isa Transfers