Post Office savings products

I've had the Instant Saver for about 6 months. Haven't really had a problem, other than having to educate the staff at my village PO what to do (usually all the paperwork has a barcode - they scan it and their screen tells them what to do, or they have to look in their big retail manuals). You get a statement every 3 months or so. You can operate them either on the phone or through your local PO.

The catches are: 1% bonus rate for the first year - I'd recommend ditching and switching after that. Also make more than 6 withdrawals per year and you pay £1 each..


I don't have experience of the FTSE-linked accounts, but the Motley Fool is quite scathing in many articles about such products generally, particularly since they don't pay dividendes which can be quite important. It's also worth being aware that the FTSE100 is a fairly restrictive index in that it only holds big UK companies - if big companies like Vodafone, Shell and Tesco do badly then you lose out.

Note that the PO account pays only 5% on your whole sum until the first FTSE reading is taken on 14th Feb. It's quite subject to volatility: if Feb 14th is a particularly good day on the FTSE100 then the return you make is much less, even if it crashes on 15th.

It offers 7.5% gross on half your money - that's a reasonable return. But 50% of FTSE100 growth isn't great, particularly as you don't receive dividends. Without dividends the FTSE100 has gone up from 4000 to about 6500 in the last 5 years (a particularly good period). That's an increase of 10.2% per year. So you'd get 5.1%pa.

But if you had invested in a UK equity (shares) tracker fund (which attempts to do roughly the same job) then growth was from 82% to 167% (see the table of funds sorted by return over the last 5 years). That's 12.7% to 21.7% growth pa. In the better performing funds dividends are usually reinvested.

But this has been a long run of good market conditions. Taking the period over the dotcot crash 1999-2004 and the best and worst UK equity tracker funds (excluding a few outliers):
LEGAL & GENERAL (ex A&L) UK 100 INDEX E: 2002-7 growth 82%, 1999-2004 growth -26%=loss of 4.7%pa
F&C FTSE All-Share Tracker Fund 1 Acc: 2002-7 growth 108%, 1999-2004 growth -22.6%=loss of 4.15%pa
But in the same time the FTSE100 went from about 6000 to about 4500 (I'm reading this off a tiny little chart so could be a bit out), so the PO bond would pay out nothing for the FTSE100 bit and thus a growth of 3.75%pa overall.

I would have picked 1997-2002 for the downturn period but the L&G fund only started in 99. The L&G is a fairly lame former bank fund - usually it's best to steer well clear.

At the end of the day it depends what you want really. If you absolutely cannot afford to lose money, I'd recommend a savings account since at least your money will do slightly better than inflation. If you make only 3.75% on the PO bond because the market went down then you've probably just about kept pace with inflation. But with a shares investment there is the risk it may go down, but it's less likely over the long term (5 years+) - see this Motley Fool article.

Of course once you've started going down the investment route there may be other options (such as actively managed funds) that may beat the tracker, with varying degrees of risk. Read some of the investment threads here for more details.

One other thought: both halves of the PO account will be subject to income tax if you're a taxpayer. But you can use the mini stocks and shares part of your ISA allowance for this year (up to £4K) to invest in a tracker and have returns tax free.

[Note: there were some errors in an earlier version of this posting - I hope they're correct now]