Don’t put your money under the mattress

Extreme stock market volatility and the crisis at Northern Rock have prompted some crass comment about how to look after savings in uncertain times like these. Probably the worst is the glib recommendation, so often trotted out during a panic, that you might as well keep your money under the mattress. But the only people to benefit from financial advice like that are burglars.

Quite contrary to what pessimists might have you believe, anyone can still enjoy risk-free, tax-free returns comfortably ahead of inflation. Meanwhile, the more adventurous may seek to profit from setbacks suffered by others.

Long before the Chancellor, Alistair Darling, hurriedly announced that taxpayers would provide an unlimited underwriting facility for Northern Rock, the government had guaranteed deposits with another retail bank: National Savings & Investments. Perhaps because NS&I pays no commission to financial advisers, the advantages of its bonds and deposits for the risk-averse are often overlooked. But its solidity is a major virtue at times of anxiety and some of its offers are unique. Its tax-free products include an individual savings account (Isa) paying 6.3 per cent, and index-linked certificates which guarantee to pay 1.35 per cent more than inflation over fixed terms of three or five years. Better still, that’s inflation as measured by the retail price index, which is currently rising at 4.1 per cent a year — rather than the Bank of England’s preferred measure, the consumer price index, which would have us believe inflation is only 1.8 per cent. So at present, these certificates are paying 5.45 per cent tax-free and would yield more if inflation increased, less if it fell. Either way, they currently offer risk-free yields which basic-rate taxpayers would need gross returns of more than 6.8 per cent to match. Higher-rate taxpayers would need more than 9 per cent before tax to equal the return on these certificates.

For readers who find their eyes glazing over at all these numbers, what about a flutter where there is no risk of losing your original stake? Most people know that Premium Bonds pay out a £1 million prize each month but there is less awareness that more than a million other tax-free prizes are also distributed over the same period.