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Inflation-linked product worthwhile?

Investment | Protected Helpful? 5

Asked by Highwall, submitted 11 November 2011.

Open Quote With high inflation and Market volatility and low interest rates, I have been advised to move my money to a inflation protected deposit bond run by legal and general and backed by rbs. It promises 17.5% after 5 years or inflation. Please could you let me have your opinion, and if there are any risks?End Quote

Answered by Justin on 13 July 2012

Due to my slow reply (sorry) this product has been and gone. But other so-called structured products like this come onto the market from time to time, so a quick view on whether they can be worthwhile.

If inflation rises by 17.5% or less over the five years, then the 17.5% return you'll get is equivalent to 3.28% a year (taking compounding into account) - About 1% -1.5% less each year than the 'best buy' 5 year fixed rate savings accounts currently on offer.

To compensate for this lower return you have the potential to earn more interest if inflation exceeds 17.5% over the five year period. Is this likely? Looking at the price of 5 year index-linked gilts markets are currently anticipating annual inflation of around 2.2% over the next five years, so on this basis the L&G product looks quite poor value.

But...markets are not always right and this type of product could be a sensible hedge in case inflation does soar. The high inflation we've seen over the last couple of years have been driven by rising food and energy prices. Both have subsided recently (hence lower inflation), but hard to predict whether they'll soar again. Food prices are literally as unpredictable as the weather, as climate plays a big role in food supply.

Personally I wouldn't rush to buy products like these in the current climae, but in the absence of potentially more compelling inflation-linked products such as NS&I Index-Linked Certificates they're worth considering.

As for risk, structured products are built using promises from third party banks (in this example RBS) to deliver the returns at maturity. If the bank (called a 'counter-party') doesn't keep its promise you could lose money, which may not be covered by the Financial Services Compensation Scheme (FSCS). The L&G product suggests the money held by RBS for this product is covered, but this isn't always the case.


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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