What is a NS&I Index linked Cert?

What is it? Well it's simply a type of investment.

You can buy them in £100 lots.

You commit to a term of 3 or 5 years.

The interest you earn on them at each anniversary is composed of two elements. The first element is a fixed rate of interest which on the current issues is @ 1.35%. The second element, index-linking, is derived from the Retail Price Index (RPI), which is a government concoction of the rate of inflation, and of course this element is uncertain as it is variable.

The interest they yield is tax-free.

You ask if they're better than an Icesave ISA? At the moment the answer to that is probably not. However, if inflation rises sharply, then these certificates could be a good bet.

Also it's worth pointing out that National Savings currently uses the RPI as the index-linking component. There's nothing to stop them from using another measure if things moved too far in your favour. Similarly there's nothing stopping the government from removing items from the basket they currently use to measure the RPI, especially if they're close to an election and they don't want to have adverse inflationary figures.

RPI in Dec 07 was 4.0% ( http://www.statistics.gov.uk/CCI/nugget.asp?ID=19 )
Making the Savings Certificates 5.35%

For a higher rate taxpayer to get the same rate from a normal savings account
that account would have to be paying about 8.9%

So the tax-free status is attractive for higher rate taxpayers who have used up their ISA allowances.

nicko33 wrote: »

RPI in Dec 07 was 4.0% ( http://www.statistics.gov.uk/CCI/nugget.asp?ID=19 )
Making the Savings Certificates 5.35%

For a higher rate taxpayer to get the same rate from a normal savings account
that account would have to be paying about 8.9%

So the tax-free status is attractive for higher rate taxpayers who have used up their ISA allowances.

That's an excellent point regarding higher rate taxpayers. I would say that on balance and looking at the state of things at the moment that a higher rate taxpayer would probably do well to buy some on a 3 year term. I see tht RPI has been around 4% for the past 12 months and I would expect that to continue to be the case with inflationary pressures bearing hard on oil prices and the likelihood of base rate cuts over the coming months.

Savings_Dave wrote: »

I've just this week invested £5,000 for a 3 year term. As a basic rate taxpayer its not as good on paper as a high rate taxpayer...I already have a maxed out Direct ISA (funnily enough with NS&I and ready for April!), a LTSB regular monthly saver, and the NR Fixed Rate 1 Year Bond, so I decided this would be be good to add to my 'savings mix'. I also took the decision based on interest rates possibly gradually falling and/or inflation to remain steady or rise slightly over the next year - who knows...?

This way a loss (via IR cuts) on my ISA could be a possible gain for my Index Certificate...

I don't know how far the government can 'massage' the RPI figure - as already suggested in previous posts

That sounds like a balanced, sensible and steady view of things. I reckon you'll do ok with that type of spread.

Yes, you are correct in your assumption, so long as the RPI remains at or above the 4% mark. If oil prices start to fall then that might impact on the RPI and bring it down. For example, if the US falls into recession, there will be reduced demand for oil, effectively this would normally mean that the price of oil will fall and the resultant effect would be felt on the RPI. Thus it may cause downward pressure on the RPI and that in turn would result in a lower return on your IL certificates. There are many other factors that come into play, but generally speaking, a rise in the cost of fuel spells rises in the RPI as the increased cost of moving goods is passed onto the consumer.