The closure to new business of National Savings & Investments' (NS&I) index-linked savings certificates will impact every client, IFAs say.
Viv King, principal at VK Professional Financial Administration, says an average at-retirement couple could miss out on tax-free benefits and inflation safeguards on 30% of their investment following the closure.
He says, with £100,000 to invest, both partners could have put up to £15,000 each into an index-linked certificate typically paying a rate of inflation as measured by the Retail Prices Index (RPI), plus 1%.
But with RPI at about 5%, and the bonds offering tax-free interest, NS&I was yesterday forced to close part of its savings business because sales "far exceeded" the level anticipated.
NS&I also cut interest rates with immediate effect on its direct saver and income bonds by 0.25%, reducing rates to between 1.45% and 1.75%.
Worldwide Financial Planning's Peter McGahan says: "NS&I certificates were a no-brainer for IFAs and clients. This closure will hit everyone."
He says advisers willl now have to do a lot more research to find which contracts are offering decent returns.
King says those in or at-retirement with a pot of "around £100,000" will be hit hardest, but adds the closure was inevitable.
"Who on earth can afford to offer 5% on monies at the moment?"
King says he has been incorpating NS&I certificates into many client portfolios.
"Advisers will probably revert to funds with index-linked bonds in them, or some structured products. But these mostly only offer soft guarantees clients won't lose money, unlike the cast-iron guarantees offered by NS&I."
The RPI, a measure of living costs which includes housing costs and council tax, slowed to 5% in June from 5.1%.
A basic-rate taxpayer will need to find interest rates of 6.25% or above to beat RPI. Those paying 40% income tax would need to find products paying 8.33%.
Baigrie Davies director Amanda Davidson says she will increasingly need to look for similar alternatives to NS&I certificates if inflation continues to stagnate or rise.
"Equities are another hedge against inflation, and there are some index-linked gilts."
She says she is already experiencing an increase in demand this year from clients who want to talk about the impact of rising inflation on their savings and investments.
"NS&I would typically be part of a well-balanced portfolio. But if a client comes in and says 'I want an inflation-linked investment', I would have to educate them that's not possible."
NS&I saw a near-record £5.4bn inflow of money in the first quarter of this year, with a flood of applications for its three- and five-year certificates.
It is the first time since their launch 35 years ago the index-linked bonds have been closed to new business.
Davidson adds: "Unfortunately, as the interest in these products increases the availability of them decreases."
NS&I bonds are held by 580,000 customers with £17bn deposited. Existing customers will not be affected by the move.
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