MSE News: NS&I inflation-beating savings: stick or twist?

redmalc wrote: »

Hi I have earnt £915 interest since May 2011 on 15K,better than the best accounts on offer at the moment

Or to put it another way, you have just exceeded inflation by a morsel! With most other accounts your savings would be worth less in real terms than when you invested it!

Masomnia wrote: »

Hmm, what could you have got on a 1 year fix ISA last year? I guess that's the only really useful comparison.

You're right, it only makes sense to compare what you got then with what you could have got then elsewhere, instead of what you got then with what you could get now elsewhere.

Both have 'opportunity costs' though, if you don't have enough cash to max out all your opportunities. If you put your money into an ISA and miss an NSANDI issue, which may not be available next year, you need to consider all the future years' inflation-linked returns which might been made available through re-investment, over the next few decades.

If instead you go for an inflation link from NSANDI, and don't get to use this year's cash ISA allowance, you may miss out on the ability to invest those funds within an ISA wrapper in a market leading interest rate somewhere down the line, or indeed a great S&S ISA opportunity in some future year

Our currency devalues all the time, so you can get back more than you deposit with a bank or with the government (a positive interest rate), but if you accept zero risk, what motivation does someone have to pay you a positive real return?

Inflation will sometimes run ahead of the prevailing interest rate and sometimes a bit behind. But long term, a truly risk free bank savings account can't be expected to deliver a real, inflation-beating return.

A 5k bank deposit backed by FSCS is as safe as a 5k NSANDI deposit backed by UK govt, essentially as close to risk-free as possible. The bank doesn't need to give you an inflation-busting return because you aren't gambling and don't need to be compensated for the potential downside loss. There is technically some risk and there are some market factors so in practice you can get RPI+x, but the x is not going to be very big.

So therefore you shouldn't expect to get anything higher than inflation (plus a litte bit, the 'x'), long term. Sometimes you can get a positive return after inflation if the bank is more desperate for cash, or thinks it can sell you other ancillary services or investment products and considers the temporarily-decent retail interest rate to be a marketing spend, and you can jump about and find these sometimes. But while it's satisfying to pick the highest performing product each year, unless you're psychic you won't be able to call it right and sustainably beat inflation in the long term.

So if you can't beat inflation from savings in the long term, the next best thing is to equal inflation, which these ILSCs give you.

The counterpoint is that if you know you're truly putting it away for the long term, you can perhaps afford to ride out peaks and troughs and should maybe be looking at S&S investments instead rather than savings. Then you should be able to beat inflation because you are taking risks.