To help savers find a solution to rising inflation and low interest rates, Oliver Roylance-Smith, head of savings and investment at Fair Investment, weighs up the pros and cons of inflation linked savings options versus fixed rate bonds.
"There is great uncertainty around what will happen to inflation, especially if you look beyond next year. However, what is certain is that the Retail Price Index (RPI) currently stands at 5.4% and so anything paying less is losing you money in real terms.
The only way to make sure your savings keep pace is to have a return linked to inflation, which is exactly what Legal & General’s Inflation Protected Deposit Bond does by returning any increase in RPI over five years. The plan also includes the safety net of a minimum fixed return.
A five year fixed rate bond is the natural alternative to consider, with Scottish Widows Bank offering one of the most competitive in the market with an annual interest rate of 4.6% on its 5 Year Fixed Term Deposit Account. This bond also has the attractive feature of being able to pay interest annually, quarterly or monthly.
The risk of linking to inflation is that if it comes down, a fixed rate may have proved the better option, but if inflation stays high, you made the right decision. Our view is that inflation could well rise after a short term dip but whichever route you take, you’ve got a market leading opportunity to choose from."
No news, feature article or comment should be seen as a personal recommendation to invest. If you are in any doubt as to the suitability of a particular product please contact us for advice.
These are structured deposit plans that are capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index and any of its shares is not a guide to its future performance.
© Fair Investment Company Limited