Leeds Building Society Inflation Buster ISA

consumer

Hi,

Leeds Building Society is offering Inflation Buster ISA with the interest rate on savings linked to RPI (Retail Price Index).

Here is the link

If the inflation rises, returns on this ISA will increase. But if it falls, though unlikely, returns will be less than Bank of England Base Rate.

Any thoughts whether worth considering transfer to this ISA?

opinions4u

consumer wrote: »

Hi,

Leeds Building Society is offering Inflation Buster ISA with the interest rate on savings linked to RPI (Retail Price Index).

Here is the link

If the inflation rises, returns on this ISA will increase. But if it falls, though unlikely, returns will be less than Bank of England Base Rate.

Any thoughts whether worth considering transfer to this ISA?

Certainly worth considering but:

1) The rate to September at 5% is lowish for your initial investment.
2) The RPI is likely to rise for the next few months but is then forecast to fall again. You would be buying in for two years, during most of which time your interest rate would be falling.
3) If the outlook for inflation remains high, the Bank of England would eventually have to raise interest rates anyway (unless the government changes the remit on the inflation target).

On the face of it, I think it's a good deal, but not necessarily right for everybody and you may be in a position of looking back and thinking "I wish I'd just taken a fixed rate ISA out for 2 years at 6.15% with Nationwide (if interest rates and inflation have fallen).

planemad

There is a little article here about it.

http://www.thisismoney.co.uk/saving-and-banking/article.html?in_article_id=449945&in_page_id=7&ct=5

Milarky

As the Office of National Statistics measured RPI inflation as 5.05% in July, the Isa could offer you 7.3% tax-fee even if the cost of living fails to rise any further.

The problem is (as noted above) inflation is likely to fall on average throughout the two year term -even if it rises in the short term. Don't take my word for that, take the Governor of the Bank of England. He's suggesting CPI inflation at 3% a year from now and 2% a year after that. That would suggest RPI+2.25% rates of about 6.0% and 5.0%. (not anything like the '7.3%' of the Mail article. Remember this is 'forward inflation' (inflation from now, in other words) rather than the 'backward inflation' measure reported by the ONS each month. Also the Headline '12% inflation beating cash ISA' takes the ridiculous argument that a tax free return of 7% (not!) would equate to 12% for a HR taxpayer. Oh, and it beats inflation too. Well you could say '10% inflation beating ISA' for a fixed 6% ISA and be more truthful couldn't you?

There is an important point to bear in mind with this account - not mentioned above - which is that this ISA can be exited by transferring elsewhere after 30 September next year and still receives full RPI+2.25% up to that time. If inflation has fallen sharply in the next 12 months then you will have gained from it's highest peak - and moving it out before the second year really starts could be the smart thing to do. If, on the other hand, Mervyn has overplayed his confidence in the slowing economy to squeeze inflation (i.e. maybe it just won't slow that much or maybe there will be fresh hikes in the price of oil?) then any overshoot in inflation by that time will be evident - and not moving to the ISA elsewhere might then seem a better course

Finally, they are a small society, and my application for the Issue 5 has been with them for over 3 weeks - so do expect a slow turnaround if you apply to them... ...unless you are only sending them a cheque for 2008/09 tax year yourself

Still available is the 3 year IB ISA from National Counties BS http://www.ncbs.co.uk/ncbs.asp which is different in that you cannot realistically pull out during the term (because the penalty on rates is steeper) However the rate of '+2.60%' is a not inconsiderable 0.35% pa better than the Leeds offer. Over the 3 year term this works out as the change in the RPI + 8%. The third year probably means that inflation will be a bit higher overall (e.g. 6.35, 5.35, 5.85?) as the BOE doesn't forecast that far ahead (who knows?)

consumer

Thanks for the replies.

To me, it looks more like Spread betting on Inflation, rather than pure saving product.

Also, if the inflation is going to spiral upwards, I guess Bank of England will definitely be doing something about it to bring it down.

Thisismoney should not be misleading by saying 12% Interest ISA for higher rate tax payer.

Steve_xx

Oil prices are off their peak now. If oil prices continue to slide as they have over the past couple of weeks then inflation will stabilise I think. Though I don't see RPI falling too much anytime soon as the effect of recent oil price rises continue to feed through to prices of goods and services. Wage demands will be higher this time around and this too will help keep inflation at about current levels.

You can bet that there will be some clever engineering on RPI as the govermnment has to have an election within two years. Therefore I think that this ISA is probably not the best of bets.

RayWolfe

Just exactly how do governments "engineer" RPI?

Steve_xx

In the same way that governments are capable of engineering other things when it suits their purpose to do so.

RayWolfe

Oh! That's very specific. Thanks.

Steve_xx

No problem.