5.4% tax free saving.....No Martin

ed123 wrote: »

......Martin as someone who campaigns for clarity in financial services I feel it is rather misleading to imply an annual return of 5.4% net ( re ns&i index linked accounts) based on one months figures (march 2010) when the actual return is based on the difference between the rpi index at opening & at closing (after 3or 5 years):eek::money:

Complaint: Danny_28, Post Office (post 78 in linked thread below) 22nd March 2010:eek:

https://forums.moneysavingexpert.com/discussion/2340725


I was logging on to report that the explanation for Index Linked Savings Certificates on the savings pages of this site is incorrect, then saw this post. I work for the Post Office as a Financial Specialist and I have had a number of customers come in to speak with me after receiving misleading information from this site.:(

It states under the savings section:

"Government-run savings organisation, NS&I, has 3 and 5 year Index Linked Savings that pay 1% more than inflation, the rate at which prices increase. It uses the higher measure, Retail Prices Index (RPI) inflation, at 3.7% (now 4.4%), meaning it pays 4.7% (now 5.4%) overall. The max. deposit allowed is £15,000.":(

This is completely untrue and misleads the public, exactly the sort of thing that this website is supposed to prevent.:(

The certificates pay 1% fixed, and then the difference between the RPI on the date of opening the account and the RPI in 12 months time. Therefore, with the example of last year, inflation went down and so only 1% was received. It is important to note that the rate received was not 1% plus RPI.:(

This distinction is extremely important as to lead customers to believe that they are guaranteed 1% plus the RPI figure is completely misguided and incorrect, it also means that customers are predisposed to an account which I know is wrong for them but cannot advise them of such - they trust Martin, not me.:(

OK, then you two, why don't YOU explain in one sentence how ILSCs work better than MSE does it?

NS&I have done a pretty appalling job, witness the number of threads on here over the years that start, 'I don't understand ILSCs...'.

Hi folks,

This has been raised before, and you are completely right, This is why we title the section and the anchor link (at the top of the article) as RPI+1%, and have always clearly explained how the rate varies with inflation in the article:

It's important to understand the rate you earn varies each month with inflation and while some predict it’ll be reasonably high going forward, that’s not guaranteed. At half its current rate, this product's beatable by top savings deals. Last year inflation was negative and, if it drops, so does the interest you earn.

Yet as it's guaranteed to be higher than inflation and tax free, at least you know your money will always grow quicker than prices will rise.

Hope this helps

Dan

cloudninety - The RPI is a value, not a percentage, so if the value has increased by 3%, you will get that 3% plus the 1%.

See http://www.statistics.gov.uk/downloads/theme_economy/RP02.pdf

[Hope that's the right table for I/L Certs!]

Edit: That is not the right table! It should be the RPIX.

http://www.statistics.gov.uk/downloads/theme_economy/RPIX.pdf

cloudninety wrote: »

I am still confused by Index linked savings certificates. After reading the posts yesterday, I checked the NS&I website which seemed to say (as does an earlier post) that the amount paid is 1% plus the difference between RPI when you invested and RPI when you withdrew the money. Doesn't that mean that rather than protecting you against inflation, it protects you against rises in inflation? For example, if RPI is 3% when you invest and 3% when you withdraw your money, by my understanding you will only receive the 1% on your money as inflation as not increased. However inflation is still occurring, it is just the rate at which it is occurring is not increasing; therefore your money isn't protected against inflation. Or do I have this all wrong?

See if this helps:

Start date of 3yr certificates Feb 2008:

Feb 2008: RPI = 211.4, % RPI = 4.1% (NOT the starting interest +1%)
Feb 2009: RPI = 211.4, % RPI = 0.0% (hence no interest, deflation)
(where 211.4/211.4 = 1.0000 equiv to %RPI = 0%)
(OR, alternatively, (211.4-211.4)/211.4*100 = 0%)

% Year 1 return = 1% (assume change in RPI + 1%)

Feb 2009: RPI = 211.4, % RPI = 0%
Feb 2010: RPI = 219.2, % RPI = 3.7%
(where 219.2/211.4 = 1.0368 equiv to %RPI = 3.7%)
OR, alternatively, (219.2-211.4)/211.4*100 = 3.7%)

% Year 2 return = 4.7% (assume change in RPI + 1%)

Feb 2010: RPI = 219.2, % RPI = 3.7%
Feb 2011: RPI = XXX, %RPI = X%

% Year 3 return = X%

The interest you receive is the change in RPI + 1%, year on year as in the calculations above (really + 0.85%, 0.95%, 1.21% in years 1,2 and 3).

These figures are only for February, different figures for other months.

The % return in Year 3 will depend on the RPI value in Feb 2011.


AT PRESENT:

If you invest in ILCs at the beginning of May:
Mar 2010 (latest figures from ONS): RPI = 220.7, %RPI = 4.4%.

This does not mean ILCs are yielding 4.4 + 1% = 5.4%.

In the month the ILCs mature, the %RPI is the interest rate you receive, year on year. At present the %RPI is 4.4%. However, this 4.4% return highlighted by MSE refers to the return if you invested in the last 12 months and not what you will receive in the next 12 months.

The % return you will receive in the next 12 months depends on the difference between the start RPI = 220.7 and the end RPI value in 12 months time.

The % return you will receive in the next 12 months is not related to the current %RPI of 4.4%.

The monthly %RPI figures give no meaningful indication regarding the future interest rate that will be received on the ILCs.

This is why the MSE are causing confusion when suggesting a tax free yield of 4.4% + 1% bonus = 5.4%


JamesU