Savings "inflation beater bonds"

mick1939

Brittania bldg soc are doing a 2 year "Inflation beater bond".
Guaranteed 1.75% above the RPI.
Can anyone help with their thoughts/ideas on this?
Would it be a worthwhile investment under the present climate?
(currently RPI+1.75%= 6.75%)

gozomark

its not the current RPI that matters, but what it is in one year and 2 years time. This time next year, if CPI is 1%, RPI could well be negative - what does it pay if RPI is negative ?

mick1939

gozomark wrote: »

its not the current RPI that matters, but what it is in one year and 2 years time. This time next year, if CPI is 1%, RPI could well be negative - what does it pay if RPI is negative ?

I believe if RPI drops to 0% it still pays 1.75%.But historically,I don't think it's ever been at zero?
If it did, you have to ask the question what would savings interest rates be?
Would they be at 0%? with no inflation?

gozomark

remember base rate isn't determined by current CPI, but by forecast CPI in two years time.

what would savings rate be if CPI was forecast to be 0% ? about 2% probably

earlgrey_3

Depending on your tax position and what you expect inflation to be you might also like to look at NS&I index-linked paying RPI plus 1% but tax free.

If inflation was 3% the NS&I return would be 4% net but the Britannia 4.75% less tax presumably, i.e. 3.8% net at 20% rate and just 2.85% net at 40%.

With lower than 3% inflation the Britannia offering might become the better bet for basic rate taxpayer but NS&I also offer the flexibility of early cash-in.

Lansdowne

The calculation is more interesting than it seems. Comparing NS Index lined certificates with Britannia:
- NS&I is a three or five year product though you could cash it in after two years or less. Britannia is a fixed 2yrs with no early withdrawal
- NS&I is tax free as the earl says
- Britannia accrues interest each month based on the RPI inflation rate (% change for the past year) while NS&I adds interest at the end of the year.
If RPI inflation fell steadily from the present 5% to 3% in one year's time, then remained at 3% for the second year my rough calculations are
£1000 becomes £1079 tax free after 2 years with IL Certificates
£1000 becomes £1087 after 20% tax after 2 years with Britannia
£1000 becomes £1064 after 40% tax after 2 years with Britannia

cos69

There is a similar sort of bond at Newcastle BS but pays 2.25% plus RPI august to August. Not sure if that is any better !
http://www.newcastle.co.uk/savings/inflationprotectorbond