NS&I index linked savings account

mccroskie · 21 November 2008 at 12:10PM

I have an Issue 14 index linked account which I started on 25th January 2007, should I cash this now before the inflation rate and the Retail Price Index fall ?

martinman3 · 21 November 2008 at 7:30PM

The NS&I Index Linked saving certificates are valued based on the number of full months from the last anniversary date and the change in RPI (the index not %age) from the anniversary date to the date when you cash them in. The anniversary date is the day that you purchased them, 25th January, in the years following until the maturity on 25th January 2010.

The index linking part calculated for each month can never reduce the value of the certificates below the value at the last anniversary date plus the fixed interest part.

The monthly RPI value has only just started falling. When it reaches the RPI value of your last anniversary date it means you will have had no index-linking added since then, just the fixed interest part. If it keep falling its value will be that of the last anniversary date plus the fixed interest part.

You need to decide what annual return you are happy with, deduct the fixed interest part from that leaving the index-linked part. The fixed interest part for the second year will be quoted on the certificate itself.

As you purchased in the month of January, the RPI value used for last January was 202.7. The rate for the second year of a Issue 14 is 1.1%, thanks Lansdowne :A .
If you wanted at least a 5% return from Jan 2008 to Jan 2009 the value of RPI would need to be greater than 202.7 + (202.7 x (5-1.1)/100) = 210.6

Calculation if cashed in on/after 25th Nov
The RPI value is currently 217.7 giving 7.4% of index linking, add on the fixed part (1.1/12 x 10) = 0.92% (10 = num of months to 25th Nov) gives 8.32%.

Calculation if cashed in before 25th Nov
The RPI value for Sep was 218.4 giving 7.75% of index linking, add on the fixed part (1.1/12 x 9) = 0.825% (9 = num of months to 25th Oct) gives 8.575%

The above is based on my understanding of the T&Cs, the RPI data can be accessed here

Those are the calculations, you can also get the current value using the NS&I calculator here , the value will change for your certificates on the 25th of the month.

The return is falling but remember that it is tax-free. When you decide to get out is up to you and depends on the return you can get if you put it elsewhere.

Lansdowne · 21 November 2008 at 8:56PM

Issue 14 3-year index-linked (Just happen to have the relevant old leaflet)
Year 1 RPI + 0.90
Year 2 RPI + 1.10
Year 3 RPI + 1.46%

mccroskie · 22 November 2008 at 12:27PM

Thank you for your help - it will be obvious that I am not very clever with financial matters and I think it has probably been covered already - but can I ask another question or the same question another way on this subject ?
I am wondering if all of the value of this savings certificate is calculated against the RPI on the month I cash it in or is each of the previous months RPI figures locked in and only November RPI used if I do it now (1 year 10 months of 3 years since January 2007). In other words if I leave it to February 2009 and the RPI was, say, 3% would my total return be calculated on 3% (+ the interest proportion) which would be considerably less than November 2008 ?

Lansdowne · 22 November 2008 at 3:05PM

It is quite difficult to read the terms of the index linked certificates. However if I am right then:
For the interest part, you are gaining 1/12th of 1.1% per month say 90p per £1000. (After the anniversary this goes up to £1.21 per £1000).

For the index-linking part, the value varies according to the index (not the rate of inflation but the actual index of prices). So looking at the fall in prices which Martinman3 has mentioned, this is 218.4 to 217.7 in one month which is a drop of 0.32% or £3.20 per £1000. That is why the value of your certificates will drop on 25th November: It may be too late to cash them in before that date anyway.

So you have to guess whether prices are going to drop again in each of the next few months in the same way.

By the way:

As you purchased in the month of January, the RPI value for last January was 201.6.

I think that is wrong because for a certificate purchased in January the RPI published in December is used, which is the index of prices during November 2006 which was 201.1. Doesn't alter the relative figures though.

martinman3 · 23 November 2008 at 1:12AM

mccroskie wrote: »

I am wondering if all of the value of this savings certificate is calculated against the RPI on the month I cash it in or is each of the previous months RPI figures locked in and only November RPI used if I do it now (1 year 10 months of 3 years since January 2007). In other words if I leave it to February 2009 and the RPI was, say, 3% would my total return be calculated on 3% (+ the interest proportion) which would be considerably less than November 2008 ?

The return for the previous 12 months is only locked in at the anniversary dates, 25th Jan 2008, 25th Jan 2009 and 25th Jan 2010. Until then the return is calculated from the change in RPI value, (the index not %age) from the anniversary date to the current date and can go up and down from month to month. Ignore the annual RPI inflation rate as it is for the previous 12 months, not from your anniversary date to the present time.

I have found that the NS&I calculators are not accurate and are only meant as a guide. They do not take the anniversary date and present date into account when calculating index-linking. You can ring NS&I to get accurate valuations.

martinman3 · 23 November 2008 at 1:23AM

Lansdowne wrote: »

By the way:
I think that is wrong because for a certificate purchased in January the RPI published in December is used, which is the index of prices during November 2006 which was 201.1. Doesn't alter the relative figures though.

You are right, I re-read the T&Cs and they state

For the purposes of these terms and conditions, the Index figure applicable to any calendar month will be the Index figure issued in the immediately preceding calendar month.

but that means the figure issued in Dec 2006 is used for the initial Index figure which is 202.7.
I have edited my previous post again.:o

martinman3 · 25 November 2008 at 12:10AM

Today the Chancellor, in the Pre-Budget Report, stated that the expectation was for inflation to be 0.5% by the end of 2009, I assume this is the CPI figure.

That would make the average rate for 2009 probably just less than 2.5%, certainly not negative. RPI may be slightly lower but Index-Linked Savings Certificates could be useful for a long time yet when compared to savings accounts.

twokcc · 25 November 2008 at 1:04AM

PBR of reduction of 2.5% in vat could have an impact on inflation figures. In theory should reduce inflation but I suspect that many retailers will not pass on the 2.5% reduction, they are already making heavy discounts to get people to buy so a 2.5% less VAT which is not passed on will give them a small impovement to there already depleted margins. However nothing is more sure that when VAT goes back up in Jan 2010 all prices will increase which will impact on inflation figures. So in my opinion if you are going to hold until after Jan 2010 may be worth buying. Should say I hold some but have done this as a way of reducing my risk. General comment seems to be that we are entering a period of deflation, but other commentators suggest that the large increase in money supply can only lead to long term inflation. Should this be the case then I have hopeful protected my self with an investment that will equal inflation +1% that is also tax free. The low interest rates that we have had in recent years has resulted in inflation of 5% plus so with the BOE almost certain to reduce interest rates further history could repat itself.

gozomark · 25 November 2008 at 8:10AM

martinman3 wrote: »

Today the Chancellor, in the Pre-Budget Report, stated that the expectation was for inflation to be 0.5% by the end of 2009, I assume this is the CPI figure.

That would make the average rate for 2009 probably just less than 2.5%, certainly not negative. RPI may be slightly lower but Index-Linked Savings Certificates could be useful for a long time yet when compared to savings accounts.

if CPI is 0.5% end 2009, RPI is likely to be negative - maybe -1%, due to mortgage components in RPI and not in CPI

forecasts from the budget statement

CPI inflation (Q4)
2007 2%
2008 3¾%
2009 ½%
2010 2¼%
2011 2%

gozomark · 25 November 2008 at 8:25AM

from the budget speech

RPI inflation is forecast to fall below zero in 2009. In addition to the factors pushing CPI inflation lower, further declines in house prices and interest rates, in line with market expectations, put downward pressure on the measures of housing depreciation and mortgage interest payments included in the RPI. As a result, RPI inflation is forecast to fall below -2 per cent in the third quarter of 2009. This period of negative RPI inflation is expected to be relatively brief, with RPI inflation moving above zero again in 2010 as these additional downward pressures recede.

suggests RPI will be below CPI in both 2009 and 2010 - maybe -1% 2009 and +1 to 1.5% 2010

NS&I index linked savings account

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