Guarantee a return for your savings

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Money news, advice and predictions for savers and spenders. This week: index-linked savings and travel insurance.

By Jeremy Gates

If you believe our economy sits on a powder keg of inflation - and some fear its return might be the only salvation for Britain if Government plans to borrow £700bn are carried through - there are sound arguments for holding savings which guarantee an index-linked return.

If they ponder Chancellor Alistair Darling's words carefully, savers might want an alternative to banks or building societies for part of their savings. In any case, the 3%-plus fixed-rate returns, now on offer from these institutions over two or three years, could look mean if inflation takes off.

It was therefore not entirely coincidental that National Savings & Investments (NS&I) offered two new issues of Inflation-Beating Savings certificates this week.

Also called Index-linked certificates, they enable savers to invest a maximum £15,000 per issue in three-year (19th issue) or five-year (46th issue) certificates, with a minimum investment of £100.

Dax Harkins, NS&I senior savings strategist says they usually make a new issue of Index-linked certificates when they change the rate.

"In this instance, the rate stays the same - Retail Prices Index plus 1% - if held for the full term, but investors wanted a new issue to allow them to put more money in."

As NS&I certificates are tax free, the equivalent rate is index-linking plus 1.25% for basic rate taxpayers, and index-linking plus 1.67% for higher rate taxpayers. On each anniversary, interest and index-linking are added to the certificate.

The last issue was in June 2008, which effectively means that NS&I offers an opportunity to salt away up to £15,000 per person per year, or £30,000 per couple, with returns free of both income tax and capital gains tax (CGT), like ISAs.

Many savers clearly value 100% security for their cash.

Index-linked Savings Certificates were launched by NS&I in 1975, and 600,000 investors hold £16bn in them against £39bn in Premium Bonds, which are more heavily promoted.

With Premium Bond prizes falling to just 1%, new £25 prizes have been introduced to ensure Bond holders win nearly one million prizes per month. With 39bn Premium Bonds in circulation, the odds on any single bond winning are 36,000-1.

As Premium Bonds lose some appeal, the threat of inflation makes Index-linked certificates more attractive. If RPI goes negative - it currently stands at minus 0.4% - they still guarantee the annual 1% bonus on investments held to the end of their term.

In fact, this is the first time a continuous period of deflation has been experienced since NS&I launched the concept of Index-linked certificates.

With personal tax levels certain to rise after the next General Election, because our economy is in such a mess, there is a strong case for using NS&I products to hold more savings outside the tax net.

However, savers should remember that Inflation Beating Savings pay no interest at all on withdrawals after one year, with returns thereafter weighted to favour those who remain for the full term.

The experts clearly see their advantages.

"It won't have you jumping up and down with excitement, but this product already pays a better return than many instant access savings accounts, and returns could look very good if inflation kicks in seriously, maybe 18 months from now," Mark Dampier at Hargreaves Lansdown says.

"Over three-to-five years, they are not a bad bet!"

Kevin Mountford, savings expert at Moneysupermarket.com, says NS&I products should be in any balanced savings portfolio.

"With index-linking, you have the prospect of a fixed return, as opposed to accounts which are market-leading one moment and stragglers a few months later.

"Here there is the prospect of a definite return, over and above the cost of living."

However, Andrew Hagger at Moneynet.co.uk says for savers purely concerned with inflation, it's a good home for your money. But he is not sure he would tie up money for that long at present.

"Consider the West Bromwich BS E-Bond, paying 4.3% before tax on a one-year bond (minimum £5,000), or perhaps ICICI Bank's Instant Access paying 2.45% on a minimum £1, until the trend on rates becomes clearer."

:: Information: NS&I (0845 964 5000 and www.nsandi.com); NS&I's spreadsheet calculator offers an easy way to check how much each certificate is worth on www.nsandi.com/products/ilsc/calculator.jsp.

:: So long as the full impact of the supposed 'swine flu' pandemic is a matter of conjecture rather than fact, the golden rule for travellers appears to be: when you spend anything on a holiday booking, buy travel insurance straightaway, even if the departure date is months away.

Steve Williams, head of travel insurance at Confused.com says every holidaymaker should be adequately covered as soon as the holiday is booked.

"At that point, cancellation cover will be in place, while cover for everything else - medical costs, baggage, passport - starts on day of departure. A small minority of insurers only take your premium on the day you depart."

If other countries join Mexico in the Foreign & Commonwealth Office (FCO) ban, travellers with cancellation cover in place should get a refund.

Norwich Union (NU) says if travellers insist on going to Mexico - perhaps for a wedding - it will provide medical emergency treatment and associated expenses cover if all local health and safety guidelines are followed.

But its policies won't cover for cancellation if tour operators, travel agents or airlines cancel travel arrangements, or if travellers won't travel to Mexico. NU advises customers to contact operators, travel agents or airlines in the first instance.

There can be 'grey' areas on claims. As the XL Leisure and Zoom airline collapses showed, operators, airlines and insurers might play 'pass the parcel' on liability.

As a general rule, once the FCO advises against all but essential travel, travel costs should be refunded by the tour operator, or an alternative holiday offered.

The same goes for airlines, but independent travellers don't always find getting money back easy - particularly if they bought insurance online and haven't got a broker actively backing their claim.

"With nobody knowing how serious a problem this will become, insurers will try to find reasons to pay out as little as possible," Williams says.

"There is no longer any argument about Mexico, but suppose you don't want to go to Spain if cases emerge there. Insurers may say you could have reasonably expected the pandemic to spread to Spain and reject your claim."

Until the FCO rules a destination too dangerous for all but essential travel, travellers will only get insurers to refund holiday costs if they provide a specific and accepted reason not to travel.

Williams says current uncertainties make a strong case for buying an annual travel policy for the family, because insurers facing a deteriorating situation will try to limit their exposure to claims.

Graeme Trudgill at the British Insurance Brokers Association (BIBA) says policy clauses relating to "disinclination to travel" were tightened after 9/11, when many travellers no longer wished to get on planes.

Trudgill says problems might arise if airlines still fly to destinations where travellers don't wish to go; in some cases, insurers and brokers might help customers to get money back from airlines.

But independent travellers trying to get money back for flights, accommodation and other items can find it "much harder".

BIBA rates Tokio Marine travel cover among the best on several counts: willingness to cover terrorism, reasonable excesses, acceptance of older travellers (up to 85), and willingness to take customers with illnesses like diabetes, subject to medical screening.

Tokio Marine policies also cover sports others deem hazardous, like rock climbing and horse riding, at no extra cost.

"You would be amazed how many people pay £5,000 for a cruise and buy a policy with a limit of £2,000 cancellation cover," says Trudgill. Around 20% of travellers buy no insurance at all.

M&S Money's travel insurance, rated five stars in quality by the analysts Defaqto, offers annual family policies in Europe from £88.75, worldwide from £180.28.

:: Information: BIBA, which advises travellers to countries with no FCO travel advice on Swine flu to get a broker to ensure appropriate cover, can be contacted on 0870 950 1790 and www.biba.org.uk/travel; M&S Money (0800 068 3918).

World First Travel Insurance checklist, with seven top tips to ensure travellers buy the right insurance product before they go, is available online at www.world-first.co.uk/media/checklist.pdf

Poundnotes

:: Headline mortgage rates don't always offer the best (ie. cheapest) deals, says Yorkshire BS. For instance, HSBC's 2.89% two-year fix looks untouchable, but when cost of fees is taken into account, it is only the seventh best buy for a £100,000 loan.

According to its "true cost" comparison, Yorkshire BS reckons the best buy for a two-year fix is First Direct (2.99%), followed by Yorkshire BS (3.59%), RBS (3.09%) and Chelsea BS (3.39%).

Tim Girling at Yorkshire BS says by looking at the true cost of a mortgage over the course of a deal, borrowers can see exactly how much they will pay.

"Look at all costs and special offers over the term, including arrangement fees, valuation fees and any cashbacks, plus initial headline rate."

:: Income seekers despairing of low interest rates should not ignore boring old investment trusts - companies which merely hold shares and other investments to generate decent income and capital gains for investors.

James Saunders at JP Morgan Asset Management likes The Mercantile Investment Trust, which has just paid its fourth quarterly dividend to make a total 36p for the year, a yield of more than 4.7%.

Mercantile shares currently cost around £7.60, down from a year high of £10-plus.

:: Although Halifax is offering to pay stamp duty for borrowers, and also to pay half of first time buyers and home movers council tax in year one to the maximum value of £1,000, Louise Cuming, head of mortgages at Moneysupermarket.com. says buyers need to be wary of the interest rate charged - a "whopping 7.49%" fixed for five years.

For instance, on a £200,000 purchase, NatWest's five-year 5.99% fix at maximum 90% LTV is cheaper over five years than the Halifax deal even though Halifax pays £2,000 stamp duty.

However, Cuming hopes other providers will be quick to follow the Halifax lead, and launch new schemes to get the market moving again.

:: Savers can at last get decent returns after several providers increased rates or launched new accounts paying competitive rates, says Michelle Slade at Moneyfacts.co.uk.

"Fixed rate bonds continue to offer best rates for savers, with 35 accounts now paying rates of 4% and above, compared to just two at the start of March," says Slade.

"However, to get these great rates, you need to commit your money for at least two years. West Bromwich BS is the only exception to this, offering a fantastic 4.30% on its 13-month bond."

:: Having completed his first 100 days, Barack Obama could have some interesting effects on shares, says Sheridan Admans at The Share Centre. He thinks managed funds to benefit could include First State Global Listed Infrastructure A Income Fund; Schroder US Small and Mid Cap Fund; Neptune US Opportunities Fund.

:: High Five Savers:

Phone No Rate Account Period Deposit Interest paid

Chesham BS 08000 186 214 4.50% (F) Fixed rate Bond to 31/05/14 £1,0000 Yly

ICICI Bank UK www.icicibank.co.uk 4.40% (F) HiSAVE Fixed Rate Five Year Bond £1,000 OM

Halifax www.halifax.co.uk 4.30% (F) Web Saver Five Years £500 Yly

Barclays Bank 0800 494 949 3.55% Golden ISA Instant £1 Mly

United Nat Bank 0800 218 2266 3.50% Three Month Gold Deposit Three Months £1 Half-yearly

:: Top Five Borrowers

Phone No Rate Period Max% Adv Fee Incentive

HSBC 0800 494 999 2.49% discounted for two years 60% £249 Yes

First Direct 0845 610 0100 2.89% variable for term 80% £799 Yes

HSBC 0800 494 999 2.95% variable for term 75% £799 Yes

Co-Op Bank 0800 633 5286 3.24% to 31/09/12 75% £995 Yes

The One Account 0845 610 1060 3.75% for term 75% nil Yes

Code:

*F - Fixed

*P - Operated by Post

*B - Operated by Post/Telephone

*T - Operated by Telephone

*W - Operated by Internet

*H - Operated by Internet/Telephone

*S - Available only to those aged 50 or over

*R - Available to those aged 60 and over.

:: Source: Money£acts - Tel: 01603 476 476 (All rates subject to change without notice)