Index-linked savings accounts

If you have spare cash to put aside for the future, index-linked savings accounts may be right for you.  They 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.   

These accounts may also be known as 'index-linked savings certificates' or 'inflation-linked savings'.  See this video which explains what inflation means, from the Money Advice Service.

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 

    Money fitness tip

    Set up a standing order to pay a regular amount each payday into your savings account. Stay MoneyFit and increase it if you get a pay rise.

  • with base rates currently at 0.5% and inflation around 2% (February 2019) 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, National Savings and Investments. These are limited offers, so they won't always be available.

Index-linked savings certificates available from the NS&I are currently closed to new savers although if you already have some you can rollover your existing accounts once they mature.

If you choose to renew at the end of your current term, you can choose to receive interest tax-free based on the consumer prices index (CPI) measure of inflation rather than the retail prices index (RPI). CPI tends to be based on a lower figure which will mean you’ll earn less interest relative to interest based on RPI.

Receiving interest tax-free means it won’t count towards your personal savings allowance.

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

Money fitness tip

An index-linked savings account may be a good choice if you want to protect your savings from inflation.

  • 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.

Charges

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 authorised UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation SchemeThe FSCS savings protection limit is £85,000  (or £170,000 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. 

Money fitness tip

Check the AER, which shows you whether an account paying monthly interest is better than one paying interest once a year.

Tax on index-linked savings accounts

Since April 2016 any interest earned on savings is now paid without tax deducted, but interest earned on your savings is still taxable. It’s your responsibility to pay any tax due on your savings.

For example, anyone earning over their Personal Savings Allowance in a tax year (£1,000 for a basic tax payer) will need to inform HMRC in order to pay any tax due. If you are not on Self Assessment, HRMC will normally do this by changing your tax code for the following tax year so that you can pay any tax due over the course of the year.

Money saved in an ISA or in an Index-linked Savings Certificate from NS&I (currently not available) provides a tax free alternative. So any interest earned on your savings in these accounts is not taxable and will not contribute towards your personal savings allowance.

The Personal Savings Allowance

As of April 2016 you will be entitled to a Personal Savings Allowance. This means you won’t pay tax on the first £1,000 you earn from savings (or the first £500 if you’re a higher rate taxpayer).

This allowance also applies to NS&I Savings Certificates.

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 – see the Financial Ombudsman Service's website.

Next steps

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:

Remember:

  • 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.

Last reviewed: 09/04/2019

This content has been provided by the Money Advice Service