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BM Savings 5 Year Inflation Rate Bond (2)

Savings Account
Published 22 March 2011
Helpful? 12
Open Quote A competitive account of its type if you're concerned about inflation. But it's taxable and no guarantee it'll do better than a good fixed or variable rate account over the same period. End Quote
Thumbs Up
  • Protects savings from inflation.
  • Competitive rate.
Thumbs Down
  • Taxable, so taxpayers may lag inflation.
  • No withdrawals allowed.
Candid Rating
4.2
Candid Charges
Initial/Setup

N/A

Annual/Ongoing

N/A

Exit/Redemption

Withdrawals not allowed.

Other

N/A

BM Savings first version of this bond paid 0.25% plus inflation over 5 years. While reasonable, it was soon eclipsed by the Post Office launching a similar bond paying 1.5% plus inflation. Not to be outdone BM Savings has matched the Post office with a new version (issue 2) and has the added advantage that interest is paid out annually, whereas the Post Office only pays out at maturity.

So this is a 5 year savings bond paying 1.50% plus inflation (measured by the Retail Price Index) each year before tax. Interest is paid annually, on 1 June, with the inflation figure calculated over the year to the prior April. It's not possible to withdraw your money before maturity, so you need to comfortable locking it away.

As highlighted above, because interest is paid out each year you could put this in another savings account and earn more interest, potentially worth an extra 1% or so in total over 5 years versus the Post Office Inflation Linked Bond, which only pays out your interest (without compounding) at maturity.

A big potential downside of this bond is that it's not available within a cash ISA, so taxpayers may well find they 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).

For example, the Skipton Building Society is paying 4.5% on its 5 year fixed rate cash ISA, which equates to 5.62% gross for basic rate taxpayers and 7.5% gross for higher rate. If the BM Savings Inflation Rate Bond is to match this, after tax, inflation (RPI) would need to average 4.12% (basic rate taxpayers) or 6% (higher rate taxpayers). This is probably unlikely, especially for higher rate taxpayers.

The bond is available by phone or post until 16th May 2011. The minimum investment is £500 and maximum £1 million.

It's debateable whether you should be concerned about inflation over the next 5 years. But, if you are, then this bond looks like a good option to consider. Just beware that it's taxable, so taxpayers might end up better off using a  good cash ISA assuming their allowance is available.

BM Savings has also launched a 3 year version of this bond paying 0.75% plus inflation. This might appeal to those unhappy to tie up money for 5 years, but the lower rate makes the product less attractive overall.

Web Link: http://www.bmsavings.co.uk/savings/index-linked-savings/695/5-year-inflation-rate-bond-issue-2.aspx

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