MSE News: Post Office to launch inflation-beating savings

SnowMan

It has now appeared on the Post Office savings website at

http://www2.postoffice.co.uk/finance/savings-investments/inflation-linked-bond

(edit: sorry missed vt82 had already posted the link at the end of the previous page)

The way it is being marketed is pretty disgraceful in my view. It is definitely trying to mislead and bordering on incorrect. Take this from the overview page

That’s why we’ve developed our new Inflation Linked Bond – with a fixed term of 5 years and 1 day that pays a return at maturity equivalent to the annual rate of inflation (as measured by the Retail Prices Index in April each year) plus 1.50% gross/1.46% AER fixed for 5 years and 1 day.

That is no way to describe how this account works and gives the impression it is RPI + 1.46% which of course it isn't.

OK it mentions in the how it works and important information section about the lack of compounding. But a lot of people aren't going to understand that.

To quote RPI +1.46% AER is meaningless, ludicrous and outrageous in my view. You cannot separate the addition over RPI, quote that as an AER and then says it is payable on top of RPI, when the RPI itself is not compounded at all over the 5 years.

The AER quoted in the how it works bit is designed to hide what is happening too because they have picked a year where inflation is negative and the AER looks to the eye a lot more than the average RPI over the period so the lack of compounding is hidden.

If this sort of thing is OK then clearly we will have a market place of competition based on who can mislead the most effectively rather than competition on who has the best rates.


If anybody agrees then you can report is as a misleading advertisement to the FSA at

http://www.fsa.gov.uk/Pages/Doing/Regulated/Promo/Report/index.shtml

Lumphammer1

Post Office also have an early exit charge called 'Breakage Charge'. Just phoned them and they dont know how much it is either! Spoke to a supervisor who said that they had raised the question themselves during their training!

Lumphammer1

VT82 wrote: »

The early exit fee will depend on their cost to unwind the product with their hedging counterparty. It will depend on all sorts of market factors like movements in RPI futures and the LIBOR yield curve. Much too complicated to put in the brochure.

Rest assured, the hedging counterparty will rip them off to do these unwinds as the amounts will be small relative to the size of the hedge, and the Post Office won't care what the cost to break is as they will pass all the costs onto the customers. In short, if there's any chance you will need the money, don't open it!!!

The thing is that people invest thinking it will be for 5 years and things change - divorce etc.

I trust the MSE headline article will be updated to include this information.

NotaViking

The fact that the P.O. account is non-compounding is costing you £263 compared to the Yorkshire account.

But the fact that the P.O. account is paying you the 1.5% bonus every year, as opposed to just once at the end with the Yorkshire one, is gaining you £600.

Taking into account the £50 Yorkshire intro bonus, that all makes the P.O. account better by £287.

So I'm more annoyed that the Yorkshire has come up with an account that sounds like it's the same as the P.O., but it actually significantly poorer, than about the P.O. account being less good than it could be, but still the best of that type on offer.

The way the accounts are presented on the Top Saving Accounts page is really bad. By using different inflation rates in the two examples, talking about the compounding point and not the number of times the bonus is paid, it makes it look like the Yorkshire account is better than the P.O. one. Which, when you do the maths, it clearly isn't.

But plenty of people won't check the maths, they'll just see £2,500 vs £2,650 and think the difference is the compounding interest and not that the two examples are not comparable.

(The P.O. account also offers better protection against deflation by paying interest each year, rather than at the end and by guaranteeing the 1.5% each year, not just once.)

thewhirlwind

These structured products are often complicated
Which institution is ultimitely offering the capital protection on this and what/how much
is covered under the FSCS?

SnowMan

thewhirlwind wrote: »

These structured products are often complicated
Which institution is ultimitely offering the capital protection on this and what/how much
is covered under the FSCS?

The Post Office inflation linked bond is not a structured product as such (i.e. it is treated as savings and not as an investment for FSCS protection purposes). So it is covered under the £85,000 protection that applies to SAVINGS accounts.

http://www2.postoffice.co.uk/finance/savings-investments/inflation-linked-bond/faqs#11300213

fishbrid

I just filled out the online application form for the Post Office account. They now want me to send proof of ID (passport, utility bill etc.) Not the originals but certified copies. I may be wrong, but I bet the certifier - bank or solicitor - makes a charge for certifying. That would probably eat up my first year's interest at a stroke.

Lumphammer1

thewhirlwind wrote: »

These structured products are often complicated
Which institution is ultimitely offering the capital protection on this and what/how much
is covered under the FSCS?

Yorkshire are selling a Credit Suisse product. Is that covered?

NotaViking

fishbrid wrote: »

I just filled out the online application form for the Post Office account. They now want me to send proof of ID (passport, utility bill etc.) Not the originals but certified copies. I may be wrong, but I bet the certifier - bank or solicitor - makes a charge for certifying. That would probably eat up my first year's interest at a stroke.

Just get someone from your Post Office to certify it. That's what I did when I applied for a different P.O. online account and it was fine.


I see that this site has changed their example for the interest earned from the Yorkshire account, so that's good.

tokyostory88

Investors should wise up over these so called Post Office inflation linked bonds. You are being suckered into providing cheap funds to an institution that no one will lend to at anywhere near that level in the free market.

These are NOT obligations of the Post Office. The Post Office is just using its name as a facilitator for a very modest commision.

These are classified as deposit certificates to Bank of Ireland (Uk). As any investor knows, all Irish banks are basically bust but for State and super State-intervention. BOI is no exception. If you think Irish banks will not default, then you can buy various wholesale debt certficates issued by the banks or even the Government yielding 6 per-cent plus with instant access. So why lend to them at rpi +1.5 when that rate is going to fall to 3 percent in about 1 year AND with no opportunity to cash in early but have your funds stuck for 5 years.

Unless the ECB and others continue to subsidise the Celtic moggy for years to come, default in some form or another is all but guaranteed. Just a question as to who will be left holding the beautiful smiling baby. Small investors may be protected by the Uk investor protection scheme but even that has its limits and rules can change in an instant. If BOI defaults, then you will get probably get your money back less a few weeks interest income lost (after a while) but you will not get your 5 year RPI plus 1.5%.

Still if you have read this message to this sentance, you already know about this matter by now and wont be suckered by sub investment grade credit trying to get your savings on the cheap. For Ireland read Iceland.