ISA versus NS&I indexed linked -which one?

kayzee_2

Hi, My young adult sons have £9000 to save. As they struggle to find their ISA allowance each year, should they put in £3600 now & hold back the rest 'til April for next year, or would they be better to put into NS & I indexed linked tax free bond for 3 years? They are basic rate taxpayers.

earlgrey_3

Depends on what you think will happen to inflation and what interest rates they can get elsewhere. Most forecast it will fall.

If they are very quick and apply today they could get the surplus over their ISA allowance into the Coventry Poppy Bond at 6.25% for a year. http://www.coventrybuildingsociety.co.uk

isofa

Put 3600 away now in a good ISA, then they have various options for the rest.

Could keep a further 3600 in a instant access account, and move into a Cash ISA on 6/4/09. Then the rest in a good fixed rate term account, which are rapidly evaporating!

The NS+I ILSC are a good idea, but you have to invest for at least a year before you get any return (cash in before a year and you only get your original money back), they normal terms are 3 and 5 years. Inflation is unlikely to rocket at the moment, so I'm not sure they are the best deals at present, but you never know what might happen.

kayzee_2

I'm lost - I thought interest rates were going to go thro' the roof like they did in the 90's when I had a huge mortgage! My sons can't be quick 'cos we have to wait for the cheque to clear. I have no idea what inflation might or might not do but thought the tax free part of the NS & I thing was a good idea. Pehaps they should put £3600 in Isa & the rest in NS & I? Any advice appreciated 'cos everything I thought would happen has turned on it's head.

kayzee_2

Thanks both, sorry isofa, I typed my 2nd post before I saw your reply - oh the responsibility of helping your kids with their finances - nightmare!

Jonbvn

With interst rates and RPI likely to fall, it is probably best to see if they can open some fixed rate accounts (FR ISA's + FR savings).

earlgrey_3

kayzee wrote: »

My sons can't be quick 'cos we have to wait for the cheque to clear. I have no idea what inflation might or might not do but thought the tax free part of the NS & I thing was a good idea. Pehaps they should put £3600 in Isa & the rest in NS & I?

For basic rate payers NS&I tend not to be the best return but are worry-free if that's what they want. (After paying into their ISAs.)

Depending on when you expect the cheques to clear they still may be in with a chance with the Coventry deal. You could fill in the forms on their behalf and print them out now. See what happens. They'll be allowing a short time for forms and cash to reach them and can be added to until next week. Minimum investment is £500. Otherwise have a search around once they have the loot.

HankMcSpank

When we had all the chaos afew weeks ago, I seriously considered NSI, but I'm pleased I didn't....


http://www.telegraph.co.uk/finance/3448664/Abandon-all-hope-once-you-enter-deflation.html

"We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year. This is a drastic reversal of the oil and food spike that played such havoc with monetary policy over the summer. "The world changed in September," said the Governor."

Turn negative?!!!

NSI Pays RPI + 1%. Ok, so you can't lose money , but being locked into an account based on an index that's anticipated to turn negative sucks!

martinman3

HankMcSpank wrote: »

When we had all the chaos afew weeks ago, I seriously considered NSI, but I'm pleased I didn't....


http://www.telegraph.co.uk/finance/3448664/Abandon-all-hope-once-you-enter-deflation.html

"We are not there yet but Mervyn King, the Governor of the Bank of England, says it is now "very likely" that the UK retail price index will turn negative next year. This is a drastic reversal of the oil and food spike that played such havoc with monetary policy over the summer. "The world changed in September," said the Governor."

Turn negative?!!!

NSI Pays RPI + 1%. Ok, so you can't lose money , but being locked into an account based on an index that's anticipated to turn negative sucks!

You are incorrect on one important point, NS&I ILSC can be cashed in, in total or in part, at anytime so if the return drops below an acceptable level you cash them in. They are not like fixed rate bonds.

Even Mervyn King doesn't have a crystal ball which is why he said "very likely". A lot depends on how much oil production is cut and the strength of the pound against the dollar so when/if annual RPI rate going -ve may happen is unknown, hence the advantage of being able to withdraw at any time.Holding existing certificates and waiting to see is the thing to do.

For new certificates however, anyone who believes that annual RPI rate will be -0.85% or less in 12 months time should not buy new 3yr certificates (-0.75% or less for 5yr certs) as no interest is payable if cashed in the first year and they would certainly lose out. This is because interest for first year is 0.75/0.85% and not 1%.