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You Are Here: Home > Personal Finance > Banking & Saving > FAQ > Question and answer
Why there's a problem with

NS&I's Inflation Proof Bonds
Last update : November 2011
Index Linked Certificates, which are described as paper inflation proof bonds, are offered by the National Savings & Investments (NS&I) and look to be perfect on paper.

The certificates work by offering a small annual yield, perhaps 1% + the official RPI (Retail Price Index) as their official interest rate.

  • So if the RPI is 3.2% the bonds would yield 4.2% (3.2 + 1)
  • Note that when the RPI rises or falls the overall interest rate will also rise or fall correspondingly
The certificates are usually either 3 or 5 years in duration and can be cashed in before they expire but not in the first year. But of course the small print can always change so make sure you check it.
The problem with all Index linked savings products

The problem with these savings products is simple.

As the RPI is normally manipulated lower they will only ever offer a partial hedge against high inflation

Sadly, there is nothing savers can do about this. Overall though Index Linked Certificates are a useful addition to a saver's armoury and the trick to using them is diversification, ie don't put all your eggs in one basket.

For example, a saver with £10,000 in cash would be wise not to put more than £2,500 (25%) of his money into any one product, including NS&I products.

Finally, because the NS&I is owned and operated by the Government your money is 101% safe and this is a major selling point for many investors, especially the older generation.

See also
FREE Stocks & Shares ISA Report
Why you must think long term with ISAs
Costs and charges - How to slash them
The best broker to use - and why
How to build a Portfolio of different asset classes
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