Still looking to beat inflation with your savings?
Hahahahahaha. That’s right, with the Bank of England interest rate still languishing in the doldrums and the recent withdrawal of the idex-linked (i.e. inflation beating) National Saving Certificates, you will forgive us for laughing at the sheer ridiculosity of the idea. But is it so ridiculous to want savings that end up being worth at least the same as when you invested? A new investment product on the market may make sense to some savers, or may just add to the uncertainty and risk in the current savings market.
The National Grid (yes those electricity types) are issuing index-linked corporate bonds, the first to be made available to ‘ordinary’ (man on the street. Well, not literally on the street as he may not have enough cash to buy a bond) investors, that pay an annual interest rate (1.25%) that is adjusted for inflation as well as an inflation busting capital return on redemption.
The bonds are for a ten year fixed period and income payments are made twice a year, in April and October. The minimum investment is £2,000, rising in increments of £100, but cleverly you can increase your effective return by holding the bonds in a tax-efficient ISA or self-invested personal pension (SIPP).
On maturity, investors will receive the face value of their bond plus any rise in RPI between February 2011 (eight months prior to issue) and February 2021 (eight months before maturity). If RPI falls over that time - negative inflation, or deflation - investors would receive only their original capital. So beware- economists expect the current high inflation to fall over the longer term. Danny Cox at Hargreaves Lansdown told the Sunday Times that the markets are pricing in an RPI rate of 2.64% over 10 years, almost half what it is today.
Income Corporate bonds are IOUs issued by companies to raise money. In return for lending the company cash, investors get a return plus their money back at the end of the term — provided the company doesn’t go bust before then. Note that, unlike savings deposits, there is no protection from the Financial Services Compensation Scheme.
The National Grid bonds are rated BBB+ by Standard & Poor’s and BAA1 by Moody’s, the ratings agencies. This means they are seen as a medium risk rather than top-rated investment as is normally given to Government backed loan instruments.
You can sell the bonds before maturity, but you would have to trade them on the open market, so you could get back more, or less, than you invested.
So although inflation is built in to both the interest coupon and the capital return, given the long term nature of this bond, it may be a gamble too far for many.