The current rate of inflation is well above the Bank of England’s target of 2% and is a major cause of concern for savers across the UK. We take a look at a recent new entrant to the market which offers a valuable solution.
No safe haven
With the Retail Price Index currently at 5.4%, all but non-taxpayers have to achieve a return of 6.75% just to maintain the purchasing value of their savings. But with the protracted period of low interest rates and the volatile stock market reactions to the ongoing barrage of weak economic data, it is proving difficult to find an attractive solution.
Fixed rate bonds are often the cornerstone of a saver’s portfolio as they offer a choice of terms and a fixed rate at outset. However, with 5 year fixed rates offering little above the 4.5% mark (3.6% after basic rate tax), these are falling far short of providing any sort of hedge against inflation.
Inflation’s best kept secret
This is where the latest release from Legal & General provides a valuable solution to those concerned about the impact inflation will have on their savings, and stands out as a strong alternative when compared to the rates available from going down the more traditional fixed rate bond route.
The Legal & General Inflation Protected Deposit Bond 1 is a five year plan that combines capital protection with a return linked to the performance of the Retail Price Index. Historically the Retail Price Index has been slightly higher than the Consumer Price Index (CPI) since it includes housing costs and mortgage interest payments. Should this continue, this latest offering from Legal & General could provide a return which actually beats CPI over the term of the plan.
Capital protection
As the plan is a structured deposit you will receive your initial deposit back in full after the five year term, regardless of what happens to the Retail Price Index, and as long as the deposit taker for the plan, the Royal Bank of Scotland (RBS), is able to repay your money.
In the event that RBS is unable to meet its liabilities, the plan would come under the remit of the Financial Services Compensation Scheme deposit protection. This means savers could be eligible for compensation from the scheme up to £85,000 per person if RBS was unable to return the capital invested to savers.
Linked to inflation or a fixed return
The monthly release of the year on year rate of inflation focuses very much on the short term impact of the measures taken by the government and the Bank of England. However, the longer term is as important, if not more important, when considering how to fight inflation, since any shortfall from your savings rate has a greater impact over time (see our article: ‘What will happen to inflation’)
Although most savers interested in this plan will consider it as foremost a hedge against inflation, the plan also includes a minimum fixed return of 17.5% should the rate of inflation actually be less than this over the five year term. This provides some peace of mind should the rate of inflation fall significantly over the longer term.
Best of both worlds
To find a solution that offers the potential for a high return but with your capital protected is something which does not come along every day. But with the historically high levels of inflation we are currently experiencing combined with the uncertainty surrounding what will happen in the future, especially in the medium to longer term, this plan could do just that.
Oliver Roylance-Smith, head of savings and investments at Fair Investment Company said: “This latest offering from Legal & General combines three valuable elements – capital protection, a hedge against inflation and a minimum return, and as such is a highly attractive and competitive option for those concerned about inflation, especially in the current economic climate”.
The plan is open for direct investments, Cash ISAs and Cash ISA transfers, as well as to businesses and charities.
For more information about the Legal & General Inflation Protected Deposit Bond and to apply, click here »
This is a structured deposit plan that is 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 is not a guide to its future performance.
© Fair Investment Company Limited