The particularly nice thing with NSandI which is not normally true for other indexed linked investments eg index linked gilts, is that if inflation goes negative you can actually lose capital ie negative inflation works against you. NSandI will however guarantee you 1% even if inflation was say -10% (in which case deflation is to be hoped for). So before taking out any indexed linked deal always check how the intesest / inflation linking elements work.
For all those of you interested in NSandI there is a sneaky (but perfectly legal) method of increasing your allowance.
Normally each indexed linked issue gives each person applying 15K @ 3yr, 15K @ 5yr. However, you can actually hold certs in trust for someone else without impacting you own holding so a wife can hold another £15K in trust for her husband and vice versa, thereby ending up with 60K rather than 30K. However note you can't get the require forms from the post office or make an online application but have to ring them up and specifically ask.
In reply to ynys - you do - or rather all Uk tax payers do - NSandI fund some of HMG deficit - for this years the order of 2 billion quid - and the NSandI interest you receive is part of the interest on our hugh debt mountain the gov has to pay. Why do you think they decided to allow existing holders to roll over their holdings at the prevailing rate - the last thing they wanted over the last few years is every man and is dog withdrawing money and having to then borrow it at a much higher rate on the open market. Lets face it an interest rate of say 3.5% in normal times is pretty good, during the short period of deflation they were only paying 1%. In reality I suspect they would have loved to suck every penny of every saver in - home grown creditors are the best ones to have - but in the process they would have completely wiped out the retail bank deposits and with it the banks. As majic says the pundent are effectively being used to help recapitalise the banks on the cheap. This new issue is probably a small carrot to draw some of the flak