NS & I Index Linked Savings Certificates how is interest calculated

twokcc

Just invested in 3 year issue but cannot find out how calculation of interest is made. eg NS & I qoute
purchase price + Index-linking for year 1 + 0.85% of purchase price = 1st anniversary value
How does index linking work is it done on RPI increase in 12 monthe time.
i.e if RPI increased by 5% in 12 months time I would be due 5.85% of sum invested tax free. This seems OK unless anniversary date happens to be a month with low inflation, if inflation was 4-5% for first 11 months then falls to say 1% for 12 month would I only get 1.85% increase in value on anniversary. If this was the case would be a very poor return particularily as 11 months with high inflation .
Hope someone can advise me that the calculation is somehow done on each monthly RPI increase so that I benefit from each months actual movement in the RPI. Seen the calculator on NS & I site but this only gives a current value in £'s for past investment with no details of + % or change in retail price index.
Any help appreciated as would like to set up spreadsheet to estimate of monthy interest that will be due.
Thanks
Ken

RayWolfe

No, inflation at an annual rate is used. So if suddenly inflation were to decrease dramatically the annual rate will not move by as much. Try looking up RPI and you will get the National Statistics Department where all the past numbers are given.

isofa

NS&I have a spreadsheet set-up to calculate the value: http://www.nsandi.com/products/ilsc/cashvalues.jsp

Inflation Rate details and graphs here from the government: http://www.statistics.gov.uk/cci/nugget.asp?id=19

MJS996

I receive newsletters from MotleyFool as well and they were recommending Index linked savings certificates.

So - as a higher rate taxpayer, if the best rate I can hope for is 7.15% for a bond with the Kaupthing Edge, I would be correct in assuming that I will only get 60% of the interest after tax which takes it down to an effective rate of 4.29%

So - if NSandI are offering tax free index linked savings certificates at RPI plus 1%, provided RPI stays above 3.29% (currently 4.6% I believe), then I would be better off with the NSandI cert.? Looking at the graph on the link above, RPI doesn't seem to have been that low since 12 months ago and has been substantially higher for the most part of the last 12 months.

So - where's the catch? What am I missing?

Thanks
Martin

RayWolfe

No catch.
You take your chance on where RPI and interest rates are going. NS&I Index Linked certificates have always been attractive for higher rate tax payers. No necessarily best but generally competitive.
Maybe the limit of 15K per issue might seem like a catch to some.

chris1

RayWolfe wrote: »

if suddenly inflation were to decrease dramatically the annual rate will not move by as much.

I don't understand what that sentence means - I thought the previous poster was correct?

if inflation was 4-5% for first 11 months then falls to say 1% for 12th month would I only get 1.85% increase in value on anniversary.

twokcc

Thanks for replies, still not sure of how this index linking/interest is calculated if for example
RPI at date of investment was say 100
inflation for first 11 months 5% so index then 105
no inflation for month 12 so index is still 105

Would my index for 12 month period be based
a)on cumulative movement for 12 month period i.e 5% (before additional % added)
b)no increase in inflation in month 12 so index linking zero and interest % zero (again before additional % added)

Common sense would suggest a) can anyone confirm that this is correct?

Biggles

twokcc wrote: »

Would my index for 12 month period be based
a)on cumulative movement for 12 month period i.e 5% (before additional % added)
b)no increase in inflation in month 12 so index linking zero and interest % zero (again before additional % added)

Common sense would suggest a) can anyone confirm that this is correct?

a) is correct. As already stated, it's the change in the RPI (not in the % inflation) over the period of the investment.

It's all set out in the T&Cs http://www.nsandi.com/products/ilsc/tandc.jsp