Index-linked National Savings are back on sale again. They are available only for 5 year terms (previously there was a 3 year term too) and the return is only 0.5% plus RPI and it is free of income tax (previously it had been up to 1% plus RPI).

However, if there is a tranche of money that you would like to protect against the effect of inflation without taking any risk to capital, then this is a good product.

If inflation (as measured by RPI) stays high (approximately 5%) then a tax-free return of over 5% with no risk to capital is obviously a good thing.

On the other hand if inflation falls, the return will not be so good. Also, inflation as measured by RPI might not equate to your own ‘personal’ rate of inflation.

The chart below maps the Bank of England’s own forecast for Inflation using the lower index of CPI. You will usually expect RPI to be higher so it was a pleasant surprise that NS&I kept the old higher index of RPI not CPI.

Based on this prediction alone there is a strong argument to hold these certificates for say two to three years and then switch to a different product paying more income depending on your tax position. If inflation averaged 3% then the tax free income is equivalent to 5.83% interest rate to a higher rate tax payer.

This is the Bank Of England (CPI) Inflation Report Fan Charts - for May 2011

Money can be withdrawn before the 5 year term is up but there will be no index-linking or interest paid on money withdrawn in the first year.

The maximum investment is £15,000. They can only be bought directly from NS&I, details here; www.nsandi.com/savings-index-linked-savings-certificates