Cashing in NS&I index linked certificates. Which little piggy?

afwone · 18 June 2013 at 9:25PM

I am one of the fortunate ones who salted away maximum amounts in NS&I index linked savings certificates when they were available and I had the means. I now have five each started with £15,000, though some are now worth closer to £20,000:

3 years RPI+0.5% (Matures Oct 2014)
5 years RPI+1.0% (Matures June 2015)
3 years RPI+0.25% (Matures Feb 2016)
3 years RPI+0.25% (Matures Apr 2016)
5 years RPI+1.0% (Matures May 2016)

Alas, my days of prudence are over, and I want to fund a bit of extravagant living. I plan to cash in two or three of these certificates in the next week.

Which should I choose? With the change in terms for the latest offerings, I have a measly 0.25% interest over RPI, and get penalized for cashing in before yearly anniversaries. The older ones have better interest rates, but they are stacked so that it is proportionately greater as they approach maturity.

My brain is addled, anyone able to help save me using it?

bigfreddiel · 19 June 2013 at 12:25AM

when you cash an ilsc you will lose all the index linking for upto a year

so its best to cash in the certs that have matured most recently, or wait till one hits its anniversary (plus a day to be sure)

in your case cash the june one, then may, followed by apr and finally feb and oct if you must

at a rough calc each month on from the maturity date is worth about £70 to £80 pounds so cashing in 11 months into a cert will lose you about £550 to £850

hope that helps

fj

alanq · 19 June 2013 at 1:15AM

bigfreddiel wrote: »

when you cash an ilsc you will lose all the index linking for upto a year

When you cash an ILSC purchased on or after 20 September 2012 you will lose all the index linking for up to a year.

3 years RPI+0.25% (Matures Feb 2016)
3 years RPI+0.25% (Matures Apr 2016)
Purchased just a couple of months ago. A pity that the urge for extravagant living did not come on then. You would not only lose index linking for up to 12 months you would also have to pay the equivalent of 90 days interest as a penalty whenever you cash these in early. Cash in now and the April certificate will pay out less than you put in.

5 years RPI+1.0% (Matures June 2015)
5 years RPI+1.0% (Matures May 2016)
1% is the average over the 5 year term. As you say for these older certificates interest is is higher in the later years so these will give excellent returns.

My instinct says keep the "+1%"s (which will actually be paying more than that) and ditch the +0.25%s as the additional interest earned on the former will more than offset the penalties on the latter. But without doing the detailed calculations I am not sure that is correct.

bowlhead99 · 19 June 2013 at 5:36AM

Firstly as alanq says, I don't think the redemption penalties the same deal for each of them (ie the ones taken out in 2010/2011 vs this year's)? But generally you are going to have to compare penalty now versus any outperformance from holding a higher rate certificate over the next year(s).

I would be tempted to cash in the two 0.25% 2016s, as although dumping the "+1%" ones may seem to avoid much penalty (you've only had a short time since their last anniversary a few months ago), they will be generating 0.75% extra for a couple of years plus. So from today forward this is a likely 1.5%+ extra in real terms until maturity, which is better than what you give up when losing linking and paying the penalty (at say three percent) on the 0.25s since Feb/Apr.

You mentioned cashing in two or three. If you need a third holding to be encashed, probably the 0.5% 2014 could go. If its penalty terms were same as the others (which you'd need to check), it would have a largeish penalty, which is not great. But remember you can afford to lose probably half a year's interest at ~3% if it allows you to earn an extra half a percent for three years by not cashing in the best higher rate bond.

Also, if you wait until the 2014 maturing bond is ready to rollover next year you are not going to lock into a great rate at that point, as our low interest rate environment is likely to still be around then - might be signing up to a "plus zero" or "plus 0.25 - while by mid 2015/2016 the certs maturing then may have a better chance of locking up for another 3-5 years at a "plus something better".

So, I'd probably exit the 0.25s, and the 0.5 if I needed another. You're going to engage your brain though to sense check and importantly check the actual penalties for each.

afwone · 19 June 2013 at 10:56AM

It is wonderful that you three kind people have put your minds to this tricky problem while I either slept or worried about something else.

I shall read all your responses again carefully, but I think that it has to be the two recent RPI+0.25% certificates that are for the chop, and one other. Yes, looking back it would have been better to have cashed in the previous certificates a couple of months back rather than rolling them into new ones and now taking a 90 day loss of interest penalty.

An urge for blowing a substantial part of my savings on a luxury purchase was developing back then, but then various shares and retail bonds in my S&S ISA were soaring in value. Now the bonds in my ISA are showing small losses and cashing in the NS&I ILSC seems a better option.

So much easier to invest than to dis-invest.

kidmugsy · 19 June 2013 at 12:53PM

afwone wrote: »

An urge for blowing a substantial part of my savings on a luxury purchase was developing back then, but then various shares and retail bonds in my S&S ISA were soaring in value. Now the bonds in my ISA are showing small losses and cashing in the NS&I ILSC seems a better option.

I don't follow your logic. Sell ILSCs and, for all you know, you'll never be able to replace them. Sell shares and you can replace them ad lib. Retail bonds too, perhaps: S & S ISAs too, at a reasonably swift rate.

The fact that your bonds have shown losses doesn't matter a fig - they don't know they have and they won't hold it against you.

To me shares and bonds seem too expensive; I'd sell before they sink further, and cling on to the ILSCs.

afwone · 19 June 2013 at 2:37PM

kidmugsy wrote: »

I don't follow your logic. Sell ILSCs and, for all you know, you'll never be able to replace them. Sell shares and you can replace them ad lib. Retail bonds too, perhaps: S & S ISAs too, at a reasonably swift rate.

The fact that your bonds have shown losses doesn't matter a fig - they don't know they have and they won't hold it against you.

To me shares and bonds seem too expensive; I'd sell before they sink further, and cling on to the ILSCs.

A month ago I would have agreed with you, and would have offloaded bonds and shares in my ISA leaving my ILSC holdings intact. Now I think it would be a shame to lose the ISA tax wrapper. But if as you predict shares and bonds are going to sink further then it would be worthwhile getting out now.

I would expect that ILSCs will be issued again once the conditions seem right. That said, there is no way of knowing for sure. The other thing going round in my head, is what is the true market value of an ILSC were it possible to think in those terms.

I was hoping to avoid engaging my brain too much on this one, but perhaps I should think some more. Unless I am missing something, deciding what to do will ultimately be a blind leap of faith. Probably I should look for a middle way.

The prudent mindset isnt lost completely despite my recent decision to spend heavily on things I dont really need.

kidmugsy · 19 June 2013 at 6:28PM

Well, you can open new ISAs every year; nobody knows when - if ever - ILSCs will be on sale again. I'd incline to sell the shares - they yield just the same inside and outside an ISA unless you are a higher rate taxpayer.

"what is the true market value of an ILSC were it possible to think in those terms": the obvious comparator is Index-Linked Gilts. Boy, the ILSCs are so much better. However, as everyone here has agreed, the terms on the new-style ILSCs are much inferior to the terms on the old-style, so perhaps you should part with a mixture of new-style ILSCs and shares. How's that as a compromise?

afwone · 19 June 2013 at 10:16PM

kidmugsy wrote: »

perhaps you should part with a mixture of new-style ILSCs and shares. How's that as a compromise?

Seems like good advice to me.

That said, I find in the world of high finance that things can move quickly. This evening a friend has offered to lend me £50k for two years at 3.4% interest (double the rate it is currently earning in a savings account). A higher rate of interest was also proposed, but my eyes went to narrow slits. If it can be wrapped up quickly the 3.4% option seems worth thinking over.

kidmugsy · 19 June 2013 at 11:07PM

afwone wrote: »

This evening a friend has offered to lend me £50k for two years at 3.4% interest

So you'd borrow at 3.4% p.a. to allow you to avoid selling (say) shares: in other words, you are going to become a leveraged equity investor. With what do you expect to pay him back? Will you be selling shares then? Holding shares for only two years, highly geared - oof!

"How very courageous, Minister" as Sir Humphrey would have said.

redbuzzard · 20 June 2013 at 12:12AM

The shares and bonds are worth what they are worth - no guarantees attached, regardless of the prices a month ago.

You pose a good question regarding the 'true value' of ILSCs. The guarantee that they will retain their purchasing power, plus a bit, is the unique feature. And with zero credit risk.

You can sit and guess at inflation, and come up with a probable interest rate of 3% - maybe 3.4%! - but as a means of comparison with an alternative income return, that ignores the inflation guarantee - let alone the fact that the capital in shares could reduce, and I would not bet my house on your bond prices staying flat or increasing either.

Of course inflation may level out or even fall - but how is that a problem, when your purchasing power in NS&I is unaffected?

Re your attachment to the ISA wrapper - don't forget the tax free status of ILSC too, which has value even as a lower rate taxpayer.

Cashing in NS&I index linked certificates. Which little piggy?

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