Index-linked savings a better bet than Premium Bonds
When two Premium Bond prizes hit my doormat recently – only £50 apiece, of course, but the sight of one of those envelopes always lift the spirits – I decided a bit more of our shrinking family savings pot should go on this harmless flutter.
It’s possible all of us have bought too many Premium Bonds for our own good this year, because National Savings & Investments (NS&I) has been quick to slash rates in recent months.
They are probably getting more money from frightened savers than they really need.
NS&I is an increasingly safe haven, untouched by sliding property prices which make banks look more wobbly by the week.
Thanks in part to Sir Alan Sugar’s celebrated TV campaign, more than £37?billion is locked up in Premium Bonds - against £8.6?billion when Gordon Brown became Chancellor in 1997. But the interest rate which decides the Premium Bond prize kitty has fallen five times in 2008.
The latest one, effective from December 1, means the prize fund pays an effective savings rate of just 1.8 per cent.
That’s a bigger blow to Premium Bond holders than most have yet realised.
Compare winning prospects in January 2008 and January 2009.
In January 2008, total prize money topped £114?million. Prizes numbered 1.72?million and the odds on winning any prize with a £1 Bond was 21,000 to 1A year later, total prize money will be £57?million.
Prizes will number 1.05?million and the odds on winning are 36,000 to 1 – meaning they have almost doubled in a year.
Obviously, busy prime ministers intent on saving the world financial order can’t bother too much about a bunch of (mainly) mature gamblers trying to boost incomes with tax-free Premium Bond wins.
Anybody digesting the latest odds, however, won’t hope for too much from their Premium Bonds in 2009.
But does the fast-changing nature of the savings game make this the moment to look elsewhere in the NS&I product portfolio?
The other day, City grandee Sir Martin Jacomb, chairman of the Prudential until 2000, was looking at ways to get us out of our current mess.
His simple, long-term prescription is ‘more savings, less consumption’. But he accepts this ‘different emphasis’ is most unlikely to be brought in by ministers and civil servants, “who enjoy index-linked pensions that obscure the need for the rest of us to save for retirement.”
If Government opts instead for “yet more borrowing” to ease our economic ills, says Sir Martin, “the hideous spectre of inflation looms once again, two or three years ahead”.
Assuming Sir Martin has got it more than half right, I am looking with fresh eyes at NS&I’s Index-Linked Savings Certificates paying one per cent above RPI, or currently 5.2 per cent.
The rate is linked to the nominal return on government gilts, and is not a variable rate moving in line with base rate.
Rates on Index-Linked certificates will obviously plunge in 2009, but with inflation only a year or two down the line, they could soon be bouncing back upwards again.
Five-year Index-Linked certificates are currently on their 45th Issue, with the three-year version on 18th Issue.
The concept was actually launched in 1975, and relaunched as Inflation-Beating Savings in 2005.
At any one time, there are two issues of Index-Linked Certificates on sale, and savers can invest a maximum £15,000 per issue, or a total £30,000 per person in this sector.
Capital is fully protected against inflation, and again underwritten by Government as the ultimate security.
Hang on to the Premium Bonds, by all means, because the £1m jackpot could be yours next month.
But if Sir Martin has a point, maybe it’s time to direct spare savings from now on into Index-Linked certificates which might look a smart move by 2012.
INFORMATION: NS&I (0845 964 5000) and www.nsandi.co.uk. Leaflets available from W H Smith, sales through Post office branches, online and over the telephone.