National Savings cuts rate

More than 400,000 National Savings customers will see their interest rates cut from mid-November.

National Savings & Investments will cut the rate on its tax-free ISA account by 0.25% to 1.25%, after finding itself with bumper inflows of cash.

The Direct ISA, with market-leading returns, had been attracting upwards of £800m a year from savers desperate to find a reasonable return, while taking advantage of a 100 per cent government guarantee.

Even more significant was the boost from the highly popular Pensioner Bonds and by the Premium Bond maximum limit going up to £50,000.

Jane Platt, Chief Executive, said it was a "difficult decision" but the institution had to "strike a balance between the needs of our savers, taxpayers and the stability of the broader financial services sector."

The cut will apply to £3.8 billion of savings from 16th November.

How to get a Pensioner Bond

Pensioner Bonds are an exclusive investment for the over-65s with a rock solid government guarantee and market-beating rates of interest. But how can you get them?

When are Pensioner Bonds available?

They won’t be available until January and we won’t be told the exact day on which applications open until that day actually dawns.

For that reason, it’s a good idea to register on the National Savings & Investments website, if you haven’t already, to receive the information. Here is the link.

Which is the best way to apply?

When the day comes in January, you will have the choice of applying over the internet (via National Savings), by phone or by post.

There could be a rush to apply, so the postal method could take too long. Funnily enough, you would have to download the form or phone up for it in any case.

Many will opt for the internet, as long as the website doesn't freeze up, rather than risk being held on the phone for ages.

Which bonds should I buy?

You can put between £500 and £10,000 in a fixed rate 2.8% one year bond and between £500 and £10,000 in a 4% three year bond.

Obviously most people will have less than £20,000 to salt away and a large proportion will be investing less than £10,000.

If you are one of those and wondering which bond to choose, it is worth noting that the three year bond appears to pay a better rate of interest even if you cash it in after a year and pay the penalty of 90 days interest.

But both of them pay more than equivalent bonds from banks and building societies.

What do I need to have with me when I apply?

If you are applying over the internet or by phone, you will need to have your debit card handy. It has to have your name on it.

You will be asked to give your bank details and to enter your address.

They might send you a form by post for you to sign and confirm the application.

Applying by post, you would have to get hold of the form, fill it in and send it back with a cheque.

When will they take the money?

If you apply online or over the phone, the investment is deemed to have started on the same day, even if they ask you subsequently to complete a confirmation form by post.

You will receive confirmation by email or, if you choose, in a letter.

If you apply by post, the investment would start on the day the application is received, assuming in both cases that the bonds haven't been over-subscribed by that time.

When will I get my interest?

The interest is paid on maturity, in other words at the end of the investment term, or when you cash in the bond.

So it's a good way of salting money away for a decent rate of interest, but not much use if you are looking for an account which pays you interest every month.

Silver lining for savers

Today's grim news about the economy from the Bank of England has a silver lining for savers.

Cash in savings accounts has been shrinking in value, because virtually all interest rates are less than the rate of inflation.

But the Bank's Inflation Report suggests that Consumer Price Inflation (CPI), currently 5%, will drop to 2% and below in the second half of next year and to 1.3% in early 2013.

For savers, this means light at the end of a very dark tunnel.

Take two top-of-the-table accounts on Moneyfacts today, accounts which aren't distorted by bonus payments which get removed after a year.

West Brom Building Society has an internet account paying 2.8%, a money-shrinker at the moment. But potentially a money-grower if inflation does fall sharply next year.

Even with 20% tax taken off, the rate equates to 2.24%.

And you can get a similar return, tax-free, from Northern Rock's E-ISA.

For those prepared to lock their money away for 3 years, much higher rates are available: 4.3% from Yorkshire Bank, for instance, and 4.15% from the AA.

Don't expect fireworks from interest rates. Most pundits think the Bank of England's base rate will stay at 0.5% until 2013 and possibly beyond.

But at least the pain for savers could start to ease.

How to shield savings from inflation

After today's news that the Consumer Price Index rose to 4.4% from 4.2%, ways to save and get protection from inflation - courtesy of Moneyfacts.

Provider	Account	Rate	Term	Minimum Investment
Cambridge BS	Inflation Linked Bond	1.00% plus RPI	16.9.16	£5,000
NS&I	Index Linked Savings Certificates	0.50% plus RPI*	5 Years	£100
Post Office	Inflation Linked Bond Issue 2	0.50% plus RPI	10.10.14	£500
Post Office	Inflation Linked Bond Issue 2	1.50% plus RPI	11.10.16	£500
Santander	Inflation Linked Bond Issue 4	110% of the growth in the Retail Prices Index (RPI), or a guaranteed minimum return of 12%, plus original investment returned	1.4.17	£1
Yorkshire BS	Protected Capital Account – Inflation Linked 8	100% of the growth in the Retail Prices Index (RPI), or a guaranteed minimum return of 16%, plus original investment returned	15.9.17	£3,000
Yorkshire BS	Protected Capital Account – Inflation Linked 7	100% of any annual growth in the Retail Prices Index (RPI), or a guaranteed minimum of 1.5%, plus original investment returned on maturity	17.10.17	£3,000
* Interest earned tax-free Source: Moneyfacts.co.uk 15.8.11

Is inflation-proofing for you?

Pros and cons of the revamped index-linked certificates from National Savings.

Pluses

*guaranteed inflation protection

*pegged to the RPI measure of inflation not the lower CPI

*tax-free

*can cash in early, though see below

*safe haven in stormy seas

Minuses

*rate is RPI + 0.5%, down from RPI + 1% before

*5 year fixed term only, no 3 year option as before

*no interest in 1st year if cash in early, then a slightly reduced rate

*linked to RPI from next spring, by which time inflation is likely to have fallen

*stocks might not last

NS&I will be emailing 700,000 people who have registered interest in their products, many of them looking for inflation-proof investments. So there are likely to be a lot of applications.

Will they be overwhelmed again and close the issue? NS&I says it wants to keep the certificates on offer for a "sustained period".

They need to raise £14bn this year, which works out as 933,000 customers taking out the maximum investment of £15,000. But, of course, they'll be selling other investments as well.

Inflation-proof certificates are back

Savers have been desperate to find accounts which protect them from the ravages of inflation, so they'll welcome the return today of tax-free National Savings Index-linked Certificates.

The terms aren't quite as good as the previous issue, which was withdrawn last summer, causing a barrage of complaint.

The certificates are available for a five year term and pay RPI inflation (currently 5.3%) plus 0.5% as an interest rate.

Previously, you could get them for 3 or five years, and the return was RPI plus 1%.

It's extremely difficult for savers to find an an account which beats inflation and income tax combined. Virtually all of them are tax-free fixed-rate cash ISAs.

Bear in mind that the certificates don't track the monthly change in RPI. They are subject to an annual uprating.

Also, while inflation is high at the moment, it's expected to fall next year.

Is just beating inflation the best strategy?

It always pays to look ahead when you are choosing a home for your money.

I don't know what inflation will be next year and the year after, or even in five years' time. But that's the crucial consideration if you're thinking of putting savings in the new inflation-proof certificates which the Chancellor has directed National Savings to provide.

Understandably, we're all talking about Index-Linked Certificates selling out when National Savings relaunch them. They were withdrawn last summer for the first time in 35 years, after £5bn flowed in in a mere three months.

And those who have them are congratulating themselves on securing a risk-free return of RPI plus 1%, at a time when RPI inflation is 5.5% and even the best cash ISAs rate is 3.3%.

But will they be worth it? In particular, will we reach a stage soon when inflation is LESS than the better savings rates?

In last week's Budget, RPI was forecast to be lower but still high, at 3.6% next year and 3.5% in 2013. The prediction for 2015 is 3.8%. One reason is that interest rates will start rising and that props up the RPI measure.

So far so good for the certificates.

But one pessimistic member of the Bank of England's Monetary Policy Committee, Adam Posen, believes that inflation will be lower than expected next year as austerity takes hold.

The British Chambers of Commerce and IHS Global Insight suggest RPI will be 2.8% next year. Capital Economics says 2.6% and Cambridge Econometrics 2.5%.

These are the lower end of economists' forecasts, which tend to be a bit more. But it makes you think: Index-Linked Certificates might be very safe, but they won't necessarily give the best result over the fixed period of 3 or 5 years.