Index-linked Savings Certificates

Sideways

With growing speculation that inflation will hit hard over the next 12~18 months, are Index-linked Savings Certificates with NS&I a good option if you have savings that can be locked away for a few years?

I have been looking into this but its all new to me, can someone advise me of the pitfalls, what are the possible dangers?

Thanks.

JoeCrystal

Hmm... well, there are very few pitfalls with it, I can only think of two:

1. The way they work out the index-linking does not reflect the actual monthly inflation throughout the year (It is based on when you purchase the certificates).

2. The interest rate on other ways of savings may be higher (due to potential increase of Bank of England base rate) than the actual interests gained in Index-linked Savings Certificates.

Personally, it is very good option since your savings should be getting better return than inflation. But there are many different inflations and RPI is not really good one since CPI is much higher.

dunstonh

NS&I Index linked certs are a good way to hedge against inflation. I use them frequently and whilst in the short term it may not look that attractive (what does at the moment?) its always the longer term and tax free status that really makes them worth while.

Biggles

JoeCrystal wrote: »

1. The way they work out the index-linking does not reflect the actual monthly inflation throughout the year (It is based on when you purchase the certificates).

It is a rough measure admittedly, but it's about as accurate as you can get. If you buy them this month (Mar 09) with the Feb RPI at 211.4, when the Feb 10 figures are out at (say) 217.7, you will have earned (say) 4% over the year, ie actual inflation of 3% plus the 1% interest.

2. The interest rate on other ways of savings may be higher (due to potential increase of Bank of England base rate) than the actual interests gained in Index-linked Savings Certificates.

This is true and a chance you always take, but worth remembering that it's tax-free and that you can't get £30,000 (or maybe £60,000 if there are new issues) in one year into an ISA.

But there are many different inflations and RPI is not really good one since CPI is much higher.

Also true, but there are reasons why inflation (as measured by the CPI) is higher than inflation as per the RPI at the moment, and this could quite likely lead to a reversal during the next year.

I have just taken a three-year certificate.

JoeCrystal

Me too, Biggles, with five year terms. :j

[Deleted User]

We just bought the 5 year tranche this morning, to add to our other holdings, which we at started almost 5 years ago. I can`t thing of a better way to accumulate a long term nest egg

Sideways

Thanks guys.