BM Savings Inflation Bond review

With National Savings Index-Linked Certificates currently unavailable BM Savings must be hoping its new Inflation Rate Bond will plug the gap.

It's a 5 year savings bond paying 0.25% plus inflation (measured by the Retail Price Index) each year before tax. Interest is paid annually, on 28 March, with the inflation figure calculated over the year to the prior January.

While the Inflation Rate Bond is similar to Index-Linked Certificates, there are two major differences: returns are taxable and you can't withdraw your money before maturity. These points will obviously make the bond a non-starter for some.

But if you are happy to tie up your money for 5 years is the BM Savings Inflation Rate Bond a good deal?

Given the 'best buy' 5 year fixed rate savings account (Coventry Building Society) is currently paying 4.75% a year, then for the Inflation Rate Bond to deliver a higher return average inflation would need to exceed 4.5% over that period.

Is this likely? I'm not convinced. The last published RPI figures show an annual increase of 4.8% to December 2010. But the majority of this was due to higher oil/food prices and the VAT rise, all of which might not rise by as much in future (see our article for more info). If it's any help, markets seem to be predicting average RPI of 2.8% over the next 5 years based on index-linked gilt prices at the time of writing.

You also need to bear in mind that the current 4.8% RPI figure relates to price rises over the last year, whereas what matters with this bond is the extent that prices rise in future.

But if you do believe inflation (RPI) will average more than 4.5% over the next five years then the Inflation Rate Bond looks appealing versus fixed rate accounts and could be worth considering.

Taxpayers will be disappointed this bond isn't available within a cash ISA, as they'll almost certainly lag inflation after the taxman's taken his cut. Higher rate taxpayers in particular might do better opting for a conventional variable or fixed rate cash ISA (unless they wish to save more than the annual ISA allowance).

The bond is available by phone or post until 10th March 2011. The minimum investment is £500 and maximum £1 million.

BM Savings deserves a pat on the back for giving savers the option to protect their savings from inflation. It remains to be seen whether linking your savings to inflation over the next 5 years actually turns out to be worthwhile, but at least you now have the choice.

Read the full review at http://www.candidmoney.com/candidreviews/review50.aspx