Index-linked savings certificates

3 key takeaways

• Index-linked savings certificates offer returns that are adjusted based on an inflation index, providing protection against the erosion of purchasing power due to inflation.
• These certificates are typically low-risk investment options, suitable for conservative investors looking to preserve the real value of their savings.
• They are often issued by governments and come with a fixed term, during which the investment grows in line with inflation plus an additional fixed interest rate.

What are index-linked savings certificates?

Index-linked savings certificates are financial products that combine the safety of traditional savings instruments with the benefit of inflation protection. The return on these certificates is tied to an inflation index, such as the Consumer Price Index (CPI), ensuring that the value of the investment grows in real terms over time. In addition to the inflation-linked return, these certificates may also offer a fixed interest rate component, further enhancing the overall yield.

Features of index-linked savings certificates

Inflation Protection: The primary feature of these certificates is that their returns are adjusted according to changes in an inflation index, safeguarding the investor’s purchasing power.

Fixed Term: These certificates typically have a fixed term, ranging from a few years to several decades. The investment cannot be easily accessed before the maturity date without penalties.

Guaranteed Return: While the returns are linked to inflation, many index-linked savings certificates also offer a guaranteed minimum return, providing a safety net for investors.

Low Risk: These certificates are considered low-risk investments, often backed by the government, making them a secure option for conservative investors.

Tax Benefits: In some cases, the returns on index-linked savings certificates may be tax-free or offer tax advantages, making them an attractive option for tax-efficient savings.

Example of index-linked savings certificates

Example: UK National Savings & Investments (NS&I) Index-Linked Savings Certificates

The UK government, through National Savings & Investments (NS&I), offers index-linked savings certificates that protect against inflation. These certificates provide returns linked to the Retail Prices Index (RPI) plus an additional fixed interest rate.

• Initial Investment: £1,000
• Term: 5 years
• Index: Retail Prices Index (RPI)
• Additional Interest Rate: 1% per year

If the RPI increases by an average of 3% per year over the 5-year term, the total return would include the 3% inflation adjustment plus the 1% fixed interest rate, resulting in a 4% annual return on the investment.

Benefits of index-linked savings certificates

Protection Against Inflation: These certificates ensure that the value of the investment grows in line with inflation, maintaining the real value of savings.

Safety and Security: Often backed by the government, these certificates are low-risk, providing a secure investment option for risk-averse individuals.

Predictable Returns: The combination of inflation linkage and a guaranteed minimum return provides a predictable and stable return, even in volatile economic conditions.

Tax Efficiency: In some jurisdictions, the returns from index-linked savings certificates may be exempt from taxes or offer other tax benefits.

Considerations and risks

Limited Liquidity: Index-linked savings certificates are typically locked in for a fixed term, and early withdrawal may result in penalties or loss of interest.

Inflation Measure: The returns depend on the specific inflation index used, which may not always reflect the personal inflation rate experienced by the investor.

Lower Returns: While providing safety, these certificates may offer lower returns compared to riskier investments, potentially limiting growth opportunities.

Complexity: Understanding the exact terms, including how returns are calculated and any associated fees or penalties, is crucial before investing.

Related topics

• Inflation protection
• Savings accounts
• Government bonds
• Low-risk investments

Explore these related topics to gain a deeper understanding of various investment options, their risk profiles, and strategies for preserving and growing your wealth while protecting against inflation.