Index-linked savings accounts are fixed-term deposits. You agree to leave your money in the account for a certain number of years. In exchange, you’ll get an interest rate that’s linked to inflation.
Are they right for you?
An index-linked savings account might be right for you if:
- you want the value of your savings to keep up with an inflation index
- you have £500 or more that you can tie up for a fixed period of time, often three or five years
- you don’t want to risk losing any of your capital
- with base rates currently at 0.1% and inflation around 0.7% (March 2021) it is considered unlikely that you will find many or indeed any providers offering these Index-linked savings accounts to customers presently.
Where can you get them from?
Also known as ‘index-linked savings certificates’ or ‘inflation-linked savings’.
You can get an index-linked savings account from a bank, building society or NS&I.
These are limited offers, so they won’t always be available.
Index-linked savings certificates available from the NS&I are currently closed to new savers although if you already have some you can rollover your existing accounts once they mature.
If you choose to renew an existing certificate at the end of your current term, the index-linking will be calculated using the consumer prices index (CPI) measure of inflation rather than the retail prices index (RPI). CPI tends to be based on a lower figure which will mean you’ll earn less tax-free interest compared with interest based on RPI.
Receiving interest tax-free means it won’t count towards your personal savings allowance.
How they work
- You’re guaranteed to get an interest rate that equals the rate of inflation based on the index used, usually with a little extra on top as well.
- You’re not usually allowed to take money out during the fixed period and if you can there will probably be a penalty.
- If the cost of living goes down instead of up – called ‘deflation’ – you won’t lose any money, but you might get little or no interest.
Risk and return
If protecting your savings against inflation is important to you, index-linked savings might be a good choice.
- You get all the money you’ve paid into the account back at the end of the term plus accrued interest.
- In times of high inflation, you’ll get a higher interest rate and you won’t have to worry about your money losing its real value to inflation.
- In times of low inflation, you’ll probably earn less interest than you could get with an ordinary savings account, due to competition between providers’ products.
- With many accounts you’ll need to pay tax on the interest you earn, although not with some NS&I saving certificates. So after taxes, your savings might not keep up with inflation.
Access to your money
Index-linked savings accounts run for a fixed term.
Different offers have different lengths, but most run for three to five years.
With many, you can’t access your money until the end of the term. Check the facts before you commit.
There are usually no charges but there might be a penalty if you’re allowed to withdraw your money early.
Are index-linked savings safe and secure?
Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).
The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm.
It’s worth noting that some banking brands are part of the same authorised firm.
If you have more than the protection limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.
Where to get an index-linked savings account
You can set up an indexed-linked savings account directly with:
- building societies.
Some are only available online, in branch or by post.
Each index-linked offer is limited, so for the best deals, check for new offers frequently.
Tax on index-linked savings accounts
Since April 2016 any interest earned on savings is now paid without tax deducted, but interest earned on your savings is still taxable. It’s your responsibility to pay any tax due on your savings.
For example, anyone earning over their Personal Savings Allowance in a tax year (£1,000 for a basic tax payer) will need to inform HMRC in order to pay any tax due. If you are not on Self Assessment, HRMC will normally do this by changing your tax code for the following tax year so that you can pay any tax due over the course of the year.
Money saved in an ISA or in an Index-linked Savings Certificate from NS&I (currently not available) provides a tax free alternative. So any interest earned on your savings in these accounts is not taxable and will not contribute towards your personal savings allowance.
The Personal Savings Allowance
You don’t pay tax on the first £1,000 of interest if you are a basic rate taxpayer (or the first £500 if you’re a higher rate taxpayer).
This allowance also applies to NS&I Savings Certificates.
Find out more about the Personal Savings Allowance.
Find out How to get tax-free interest on savings or claiming the tax back on the HM Revenue & Customs website
If things go wrong
Banks and building societies are regulated by the Financial Conduct Authority.
If you are unhappy with the service you receive, you can make a complaint or get compensation.
Read our guide Sort out a money problem, make a complaint or get compensation.
Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.
We recommend the following websites for comparing savings accounts:
- Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
- It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.
- Find out more in our Guide to comparison sites.
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