Index Linked Savings Accounts – What’s the Risk? What should you watch out for?

By | Last Updated: 17th September 2019 | This post may contain Affiliate Links

Index Linked Savings Accounts have been available in the United Kingdom for years, they’re a designed for ‘fixed-term’ deposits. This typically means you’ll agree to leave your money in the account for a specific period of time, usually this is several years.

By doing this, you’ll get an interest rate which is ‘linked’ to inflation. While over the last decade or so, interest rates have been historically low, so this type of account may appeal to you.

You can normally purchase Index-Linked savings accounts, also sometimes known as Index-Linked saving certificates from a bank, building society or NS&I. You should be aware that this type of saving is normally regarded as a ‘limited offer’, this means there not always available throughout the year.

In addition, it’s vital to remember, that selecting the right savings account for your situation is important and ‘shouldn’t be taken lightly’. In most cases its recommended to speak to an independent finance consultant or advisor, they can assess your needs and requirements in further details.

Generally, an Index-Linked savings account can be ‘correct’ for people who have £500 or more that can be ‘invested’ for a fixed period. Remember this tends to be several years, rather than months. They can also be right if you would like the value of your savings to ‘keep up’ with inflation.

You’re not normally allowed to take the money ‘out’ during the fixed-period. If you do, there’s typically a penalty charge which will need to be paid. Obviously, each provider has different rules, so you should read all the terms and conditions before signing up to this type of account, to see how this may affect you.

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The Risks and Returns

Of course, most savings and investments carry some risk, however they also carry rewards too. Let’s take a look in more detail:

  • You’ll get all the money you’ve invested into the account at the end of your term, you’ll also get any accrued interest too. Remember though, your term could be five years or more, you need to be in this ‘for the long haul’.
  • As the account is linked to inflation, this means when inflation is ‘high’, you’ll be receiving an attractive interest rate.
  • If inflation goes ‘down’ this is called a deflation. This means you won’t lose the money you’ve invested into the savings account, but you may not earn much interest. (Sometimes during deflation, you may earn no interest at all)
  • If you do receive interest over the fixed-term of your savings, you’ll normally need to pay tax on the interest accrued. If you’re unsure whether you’re affected, please speak to a professional finance advisor to assess your situation.
  • If you want to close your account or withdraw money (if its allowed – see the terms and conditions), you’ll typically have to pay a penalty fee. This amount varies depending on which provider you use. Sometimes it can be a ‘fixed amount’, for other providers it might be a percentage.

Are Index Linked Saving Accounts Safe in the UK?

If you decide to save with a ‘reputable’ provider, such as a bank, building society or with the government’s NS&I (National Savings and Investments). The vast majority are authorised by the Prudential Regulation Authority which is protected by the Financial Services Compensation Scheme, also known as FSCS.

The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm. You can find out which banks are part of the ‘authorised firms’ on the Bank of England website .

It’s important to remember that some banking groups are classed as one firm, this means if several banks are part of the same group, they’re not individually classed as one firm each.

For example, let’s say you have the ABC banking group, this owns Bank A, Bank B and Bank C. Your main bank is Bank A, but you have a savings account in Bank C. The FSCS savings protection limit is £85,000 per firm, the ABC banking group would be regarded as the ‘firm’, not Bank A or Bank C.

This means if you had £90,000 invested across the two banks, let’s say £85,000 in Bank A and £5,000 in Bank C, and the banking group went bust. You would ‘lose’ £5,000 in Bank C as the Financial Services Compensation Scheme only guarantees up to £85,000, thus the money you have in Bank A. If this type of situation applies to you, it’s usually advised to move the excess money to a bank outside of the banking group, to make sure it’s protected.

For further information regarding your own finance situation, please speak to an independent financial adviser. The example above should be used as a ‘general guide’ only.

What Happens if something goes wrong?

Banks and building societies are regulated by the Financial Conduct Authority. If you’re unhappy with the service you’ve receive, you should speak to your provider directly to try and sort the issue out.

In ‘most cases’, any issues or problems will be concluded to a satisfactory result, however if you’re unhappy with your provider, you can normally make a complaint by referring the matter to the Financial ombudsman.

Remember it’s always a good idea to read all the documentation and terms and conditions before signing up, this will ‘normally’ prevent issues occurring down the road. If you know from the start exactly what’s required from you, any penalty charges and your providers rules, there’s less chance of an issue occurring in the first place.

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