Index-linked savings accounts
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 inflation
- 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 0.5% and inflation around 0.5% (April 2015) 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.
How they work
- You’re guaranteed to get an interest rate that equals the rate of inflation, 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 may 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 very attractive 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.
- 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 may 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 may be a penalty if you 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 £75,000 (or £150,000 for joint accounts) per authorised firm.
It is worth noting that some banking brands are part of the same authorised firm. If you have more than the 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 a bank, building society or NS&I. 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
Most people need to pay income tax on the interest they receive so basic rate tax is normally deducted as a matter of course from savings account interest.
If you’re a non-taxpayer, you can ask for interest to be paid without any tax deductions. Follow the link below to the HM Revenue & Customs (HMRC) website to find out how.
For a tax-free option, look for Index-linked Savings Certificates from NS&I if available. And investing in index-linked savings through a Cash ISA also lets you earn a tax-free return. Read our guide ISAs and other tax-efficient ways to save or invest.
The Personal Savings Allowance
As of April 2016 you are entitled to a personal savings allowance. This means you don’t pay tax on the first £1,000 you earn from savings (or the first £500 if you’re a higher rate taxpayer).
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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