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 three per cent-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 last 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 (RPI) plus one per cent – 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 per cent for basic rate taxpayers, and index-linking plus 1.67 per cent for higher rate taxpayers.

On each anniversary, interest and index-linking are added to the certificate The last issue was in June last year, 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), such as ISAs.

Many savers clearly value 100 per cent 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 only one per cent, new £25 prizes have been introduced to ensure bond holders win nearly one million prizes per month. With 39 billion 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 per cent – they still guarantee the annual one per cent 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.

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.”

For more details about NS&I products, call 0845-964- 5000.