Holding NS&I Index Linked Certificates during Deflation (negative inflation)

pjbltd

Please explain!
Will I lose money by holding NS&I index linked certificates if we enter a period of deflation or negative inflation?

gozomark

no

http://www.nsandi.com/products/ilsc/tandc.jsp

11. In the event of a decrease in the Retail Prices Index:

(a) any maturity value will never be less than the preceding anniversary value, or, in the case of a Certificate with a term of one year, the purchase price, together with interest at the relevant rate for the period from the preceding anniversary date to the maturity date;
(b) any anniversary value will never be less than the preceding anniversary value or, in the case of the first anniversary, the purchase price, together with interest at the relevant rate for the year.

Paul_Herring

http://forums.moneysavingexpert.com/showthread.html?p=5012351#post5012351

nicko33

ILSC give a return in 2 ways, index-linking and interest

I interpret clause 11 to mean that if the RPI decreases, you receive 0 (rather than negative) index-linking, plus interest.

i.e.
if an ILSC returns RPI + 1.0%, but RPI decreases,
then you just get the 1.0%

Is that how everyone else sees it?

gozomark

nicko33 wrote: »

Is that how everyone else sees it?

I'd say lowest return is 0%

any maturity value will never be less than the preceding anniversary value

I'd presume maturity value includes both components

nicko33

I've emailed NS&I to ask for clarification

nicko33

nicko33 wrote: »

I've emailed NS&I to ask for clarification

and got half an answer so far.
They've just confirmed that if inflation were 0% then the return would be 1%

I've tried again...

Lansdowne

The rule is perfectly clear as quoted above.

For example, assume a £1000 5-year certificate purchased now (Oct'08): The current interest offered (on top of RPI) is 1.00% broken down over the 5 years as
0.75, 0.85, 0.90, 1.15, 1.36%

If RPI rises by 3.5% in the next 12 months,
Value at end of year 1 (Oct '09) will be 1000 + 3.5% + 0.75% = £1042
If second-year inflation is only 1.5%
Value at end of year 2 will be 1042 + 1.5% + 0.85% = £1067
Imagine inflation is zero over year 3
Value at end of year 3 will be 1067 + 0% + 0.9% = £1078
Imagine inflation is negative (say -1.5%) during year 4
Value at end of year 4 will be 1078 + 0% + 1.15% = £1090
Imagine inflation is negative (say -3.5%) during year 5
Value at end of year 5 will be 1090 + 0% + 1.36% = £1105

So even though prices at the end of the 5yrs have fallen back to today's levels, you have gained an overall 2%, rather than only 1% because the floor of 0% is applied on an annual basis.

Hope that makes sense.

gozomark

according to http://nsandi.com/products/ilsc/rates.jsp

the anniversary value includes both components, so I still contend that the lowest return could be 0%

if so, in above example, maturity value would be £1078

Lansdowne

11. In the event of a decrease in the Retail Prices Index:

(a) any maturity value will never be less than the preceding anniversary value, or, in the case of a Certificate with a term of one year, the purchase price, together with interest at the relevant rate for the period from the preceding anniversary date to the maturity date;
(b) any anniversary value will never be less than the preceding anniversary value or, in the case of the first anniversary, the purchase price, together with interest at the relevant rate for the year.

gozomark

I think the above is poorly worded, and could mean either of us is correct, except for year 1