New wave of inflation-linked bonds

In what may spark another wave of inflation-busting savings products, the Post Office has launched a new issue of its inflation-linked bond for a limited period.

Applications for the bond are open from today (Thursday 19th January) until Thursday 29th March 2012, or until the full quota of applicants is reached.

The inflation-linked bonds are available for a three year term, which returns the RPI inflation rate plus 0.24% AER, and a five year term, which returns RPI plus 0.49% AER.

Only one lump sum deposit is allowed, starting from £500, and returns are paid at maturity. Early closure is only permitted in exceptional circumstances and is subject to a ‘Breakage Charge’, which could result in a lower return than the original investment.

Post Office Director of Savings and Investments, Richard Norman, commented:

"Since the launch of the first Inflation Linked Bond in 2010, inflation has fluctuated but has continued to remain high, leaving savers worried about the effect it will have on their savings."

Low Inflation…

However, the bond offers little guarantee against low inflation. In the (albeit unlikely) event that RPI inflation falls to 0%, the investor receives only the fixed return for that year (0.24% / 0.49%).

Should the inflation rate return to the MPC’s target rate of 2% over the bond lifetime, these returns would also pale significantly in comparison to the best three-year and five-year fixed-rate bonds on the market (Vanquis), which return 4.15% and 4.65% respectively.

The newly revised five-year inflation-linked bond offered by Legal & General, listed here at Which4U, offers an excellent compromise through its guaranteed return of at least 16% over the term (roughly 3% AER) in the event of lower inflation.

This protects against real losses whilst also ensuring that savers avoid getting stuck with a long-term, low-performing savings account should inflation fall.

The Legal & General inflation-linked bond has crept under the radar in recent months. Its availability as a cash ISA offers a greater incentive still for this innovative product to become part of your long-term savings strategy. Why not check it out today?

Mark Hornby