Can you imagine earning 12.34 percent interest – tax-free and risk-free? It sounds too good to be true.
But that is exactly the return that a smart group of savers enjoy.
This astonishingly high interest rate is paid by National Savings & Investments (NS&I) to customers who have been patiently holding their Index-Tied Savings Certificates for more than a decade.
Rewards: Retired police officer Peter Coppenhall (pictured) is one of 365,000 who have index-linked savings certificates, which have been out of stock since 2011
Peter Coppenhall, 66, of Cheshire, is one of 365,000 bonds that have gone out of sale since 2011.
Between 2007 and 2010, as economic turmoil raged, the retired police officer purchased 11 separate bonds, attracted by the fact that they are state-backed and tax-free.
The bonds varied in length between three and five years.
Once the term is up, savers like Peter can choose to reinvest or cash in the original pot plus interest. So far, like many others, he has chosen to roll them through.
He says they are the jewel in the crown of his financial planning, and he now faces a welcome dilemma: cash in and take advantage of interest when the cost of living rises, or hold out while doing so well?
He explains: ‘I had already put the maximum amount in Premium Bonds and went for the Savings Bonds because the money is protected and I had seen friends burn on the exchange.
“I’ve stayed with them — and it’s just great to sort things out with my finances during these trying times.”
His certificates consist of seven three-year bonds and four five-year bonds. Some are still linked to the Retail Price Index (RPI) – an inflation measure that is typically one percentage point higher than the Consumer Price Index (CPI).
His last three matured certificates have paid interest of 7.84 percent (pegged to RPI), 10.06 percent (pegged to CPI) and his last one at 12.34 percent (pegged to RPI).
Changes in 2019 mean that when these certificates are renewed, they will no longer be pegged to RPI, so savers are coming to an end of seeing the larger inflation measure used to calculate interest.
Mr Coppenhall’s original investment of £165,000 – he put £15,000 into each issue of the bonds – is now worth £270,000.
In its most recent figures, NS&I says there is £17 billion in Index-linked savings bonds.
Not one interest rate is paid on the certificates; it depends when the product was opened.
However, if the average saver earns 10 percent this year, it will likely cost NS&I about £140 million in interest payments per month right now.
But the Bank of England predicts that inflation will start to fall ‘sharply’ from mid-next year, meaning this interest account will likely fall lower – and more savers may be tempted to cash in after some great returns.
NS&I’s Index-Linked Certificates have not been for sale since September 6, 2011. According to NS&I, they first went on sale in July 1985.
The total amount invested in it has dwindled every year since 2019 as savers have closed their accounts.
Interest rates earned by customers fell to an all-time low for years, when inflation was just -0.1 percent in 2015. In March 2019, £19.6 billion was saved in these certificates.
The typical saver has £49,400 in the bonds. Savers can invest £15,000 per person in any term, usually three or five years from each issue.
While some customers only have one certificate, many chose to buy as many as possible, fearing they wouldn’t go on sale for long.
Steve Parker, 65, and his wife, from Surrey, have 25 of the certificates. These are a combination of three- and five-year issues.
Dream rate: NS&I’s Index-Tied Savings Certificates pay up to 12.34% interest – tax-free and risk-free
He says they have invested the maximum of £15,000 on each occasion. When a certificate approaches the expiration date, they roll it over and renew it.
Their initial cumulative investment of £375,000 is currently valued at a shadow of less than £600,000 – the profit of £225,000 is completely tax free.
He adds: ‘I wish we’d started investing sooner – these should definitely be the crème de la crème of investments right now, as they now pay about 10 percent tax-free, with no risk to your capital. Awesome.’
Others said they opened the certificates after reading Money Mail.
Steven McKinstry, 66, from Belfast, is one of them. He opened three certificates about 12 years ago with £45,000, now worth £66,023, heeding a warning that they would be withdrawn from sale.
When interest rates fell, he says he was tempted to cash in but eventually stuck with it.
Ann, who contacted Money Mail via email, says: ‘On the advice of my then financial adviser, I invested £15,000 in a three-year issue in July 2007. By June 2010 this had risen to £17,898.
‘As the balance increased over the years to over £20,000, I have withdrawn all interest up to £2,000 and reinvested a little over £20,000 every three years.
The due date in July this year showed a balance of £22,397. One of the best investments I’ve made in recent years.’
The huge interest on the certificates this year means that savers who have held them are the only ones who manage to beat double-digit inflation.
Despite months-long rate hikes, the best three-year fixed-rate savings account pays 5 percent, while the best five-year savings account pays 5.1 percent.
Meanwhile, tax-free cash offers Isas less.
The top three-year fix is 4.41 percent and five-year is 4.31 percent.
NS&I has a three-year green fixed bond that pays 3 percent, a Direct Saver with an interest of 1.8 percent and an Isa equivalent of 1.75 percent.
The underlying interest rate on the popular Premium Bonds is 2.2 percent.
l.boyce@dailymail.co.uk
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