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New inflation-linked bonds could lose you money (Savings.co.uk)

    Savings.co.uk reports on warnings for savers not to rush into inflation-linked bonds and includes the recent factsheet update from CPS Economic Researcher Ryan Bourne. 

    Anxious savers are being urged not to rush into complex inflation-linked bonds in a bid to rescue their finances from the soaring cost of living.

    The warning comes as banks, building societies and now Tesco Bank try to capitalise on widespread fear over inflation by launching bonds which pay a certain amount above the Retail Prices Index (RPI), which reached a record high of 5.2% in September.

    The Tesco Bank inflation-linked bond, which lasts for eight years, promises to pay interest twice a year, calculated by the difference between RPI in April 2011 (the underlying figure is 234.4) and RPI at eight months before each bi-annual payout (the first is on 16 June next year).

    The minimum amount you can invest is £2,000 and the bank has promised to pay back all your original investment if you hold onto the bond until the maturity date in December 2019. You may also get an additional amount back then, depending on whether RPI is higher in April 2019 than it is now.

    One silver lining to this product is that unlike other inflation-linked products on the market, the bonds can be held within a stocks and share ISA or a SIPP, and savers may be relieved to know they can sell the bonds on the secondary markets at any time.

    But these bonds pose some hard questions for savers, as returns entirely depend on the activity of inflation and even economists have struggled to predict what RPI will do.

    If inflation starts to fall next year, savers could be looking at next-to-no returns when the bond matures in eight years time, compared to if they stuck it out in a five-year fixed rate cash Isa.

    RPI was at a record high in September - when many of these bonds started appearing on the market - and many economists and the Bank of England are predicting a drop in inflation over the next half-decade.

    But economists have been proved wrong before, and research from the Centre for Policy Studies recently showed that the Bank of England has got progressively worse at predicting inflation.

    Alarm bells may also ring over the lack of official protection for these bonds, as they are not covered by the Financial Services Compensation Scheme (FSCS). Savers can opt to sell the bonds during the eight-year term, but they may not be worth as much as they are now.

    The Tesco Bank bond joins other products which promise to protect your savings from inflation, but these are also to be treated with kid gloves.

    View the original savings.co.uk article here

    Go here to view Ryan Bourne's statistical factsheet 'the recent history of MPC inflation forecasts'.

    Date added: Thursday 8th December 2011