With the Retail Prices Index (RPI) set to plummet in the coming months, savers should give inflation-linked savings products a wide berth.
Such accounts are guaranteed to either match or beat RPI over a specified amount of time. National Savings & Investments’ (NS&I) index-linked savings certificates are by far the most popular offering on the market, promising RPI plus 1% over three or five years – tax free.
When RPI soared as high as 5.2% recently, these were considered one of the most attractive savings options around. Not anymore.
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RPI to fall into negative territory
This is because the shrinking economy will cause the RPI to plummet, dragging your returns down with it.
The latest official figures are expected to show RPI falling from 5.2% to 4.6% in October alone, and Bank of England Governor Mervyn King admits it is “very likely” it will fall into negative territory at some point next year.
Economists at Fathom Consulting and Capital Economics offer a more precise prediction; claiming the RPI will fall to -2% by September 2009.
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Variable rates only good if they’re increasing
While you are in no danger of ‘earning’ negative interest on your money, the prospect of accruing next to nothing for large periods of your savings term is less than ideal – especially when you consider it will likely be well into 2010 before your money achieves an attractive rate of interest again.
It seems strange to think that, just weeks after sky-high inflation was seen as the key problem, deflation is now the buzz word on everyone’s lips. But such is the topsy-turvy nature of the economy at present.
In such an environment, variable savings rates are always going to be a risk. But when it seems almost certain those rates will plummet, it becomes a risk not worth taking.
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Safe and steady is the way ahead
With this in mind, it may be worth considering a fixed rate savings account instead. While the rates may have fallen sharply since the heady days of 7%, there are still a few decent deals out there.
As always, your first step should be to use up your £3,600 tax-free saving allowance for the year. Bradford & Bingley currently has the best fixed rate ISA on the market at 6.25% (fixed for one year), but you’ll need to act fast as it’s not likely to be around much longer.
If you want to lock your money away for a longer period, Nationwide has a two year fixed rate ISA at 5.75%, while Halifax offers three or four year fixed deals with a 5% rate.
As for the best taxable accounts, Kent Reliance Building Society has both one and two year bonds with a rate of 6%, which works out to around 4.6% Net. Clydesdale Bank offers a slightly longer three tear fixed rate deal with a 5.5% rate (4.4% Net), but you’ll need to invest at least £2,000 to get it.
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