WHILE rising inflation is bad for borrowers and may trigger another rise in interest rates soon, savers with Index Linked Savings Certificates from National Savings (NS&I) take a more benign view.

The higher inflation goes, the better the return on their money. NS&I three-year certificates currently pay a 1.15 per cent bonus over and above the 4.6 per cent rise in the Retail Prices Index (RPI) in the year to February - the highest level recorded since August 1991.

That is a total 5.75 per cent tax free - worth 9.58 per cent before tax for higher rate taxpayers and 7.18 per cent for basic rate taxpayers.

Five-year Index Linked Savings Certificates pay a bonus of 1.1 per cent - making an effective rate of 5.7 per cent, also tax free. That is worth 9.50 per cent for higher rate taxpayers, and 7.12 per cent for basic rate taxpayers.

It is also possible RPI could fall if rate rises imposed by the Bank of England take effect - so anybody buying Index Linked certificates today could be on a lower rate by mid-2008.

Few regard NS&I as a sexy investment. Frank Cochran, a Wolverhampton-based financial advisor at FSC Investment Services, said: "NS&I products rarely pay above the going rate.

"As soon as base rates come down, they'll be back in line with everybody else."

But NS&I products currently draw £9bn a year from savers, about 50 per cent up on the £6.5bn inflow recorded in 2001.

Of £78bn held by NS&I on behalf of 26 million customers, nearly half - about £35bn - is in Premium Bonds, against £17.5bn in 2001-2.

In May 2003, the personal limit on Premium Bonds rose to £30,000, against £20,000 previously. Perhaps it explains why my £50 consolation prizes get further apart, though bonds supposedly pay an effective savings rate of 3.6 per cent.

Is NS&I doing well because many of us worry about immediate financial prospects elsewhere?

The official line is that National Savings offer safety and security hard to find elsewhere, while providing a cheap source of funding for Government.

"A certain number of people do not want to expose the value of their savings to any degree of risk whatever," said Dax Harkins, NS&I senior savings strategist.

For some of them, a particularly attractive product has been the Guaranteed Equity Bond (GEB); it guarantees the original sum invested and pays an extra amount on maturity, depending on movement of shares in Britain and sometimes others around the world.

NS&I is a market leader for GEBs, and currently offers its 12th issue. On April 18, the first National Savings GEB matures after five years for savers who put in a minimum £1,000.

They won't be dancing in the streets. On April 18, 2002, the FTSE 100 stood at 5,220 and today it has advanced, after swings in both directions, to about 6,300.

An investor who put in £5,000 in 2002 will get their money back as guaranteed, and about £1,030 on top, a total return over five years of just under 20 per cent, or 3.83 per cent AER per year.

Dax Harkins says this first GEB from NS&I should be judged not so much by eventual return, as the fact that savers slept soundly in their beds while the FTSE 100 sank as low as 3,400 in March 2003.

"Savers who invested in shares directly, rather than a GEB, would have been facing heavy losses and tearing their hair out", he said.

"As it was, our customers were always certain of getting their original stake back."

Apparently, holders of NS&I's fourth GEB are really sitting pretty - having locked into FTSE-100 at just 3,847. Their plan matures in April next year, and if the FTSE 100 holds firm, they could collect gains capped at 60 per cent over five years.

The lesson appears to be that GEBs offer best value after market falls - because a revival will follow later.

Even if RPI falls over the next year or so, savers in the Index Linked Savings Certificates will still do fairly well. Best savings products from banks and building societies currently pay just over 6 per cent, netting down to around 4.8 per cent after tax.

Savers might also like the NS&I Direct ISA, paying 5.8 per cent variable on minimum £1,000 investments and guaranteed to pay 0.55 per cent above the Bank of England base rate until April 5 next year. If you missed it before April 5, check in when you like for tax year 2006-7.

National Savings & Investments products can be purchased on 0845 964 5000 or online at www.nsandi.co