NS&I Index-Linked Savings: Q&A

Rollinghome

moneylover wrote: »

I am thinking of investing £15000 maybe taking out after a year depending on circumstances.
two questions:

1 If I take out my money after 14 months do I get one year interest or 14 months. Am presuming the latter but just checking!

2 I read this in the Daily Mail Money section on Wednesday:

"buy now and your starting level will be based on Marchs inflation rate - so you will automatically benefit from the rise of close to 1pc between March and April. Wait until June 1 and you will miss out on this rise. "
I don't understand this - it implies that I have now missed the boat in some way, as I havent invested yet. It this true and if so is it likely to make much of a difference - I do understand that we cannot know how much we will get until a certificate matures or is cashed in, but I dont quite understand the specific downside of not having got investment in before end of May. Is it likely to make much difference?
Many thanks.

1) You'd get 14 months interest plus the rise in the RPI. There's an automatic calculator on the NS&I site you can use.

2) The lastest RPI is announced around the middle of month but the starting point used by NS&I for the whole month is based on the figure announced for the previous month. Had you bought at any time in May your starting point would have been 220.7 which was the position of the RPI announced on 20 April for March.

On 18 May the figure for April was released showing the RPI had risen by 0.95% to 222.8. So that gives the impression that by investing in May you'd already have 0.95% in the bag; but that's not strictly true as it's still possible the RPI could fall back again.

In Sept 2008 the RPI stood at 218.4 but fell back to 210.1 by Jan 2009 due to the temporary reduction of VAT and other factors. The RPI for Dec 2009 was 218.0 but was back to 217.9 for Jan 2010.

Incidentally, you could have bought certificates on the internet up to midnight yesterday which would have been dated for May. The starting RPI figure for certs issued in June will be 222.8 - the figure for April announced on 18 May.

moneylover

Rollinghome wrote: »

1) You'd get 14 months interest plus the rise in the RPI. There's an automatic calculator on the NS&I site you can use.

2) The lastest RPI is announced around the middle of month but the starting point used by NS&I for the whole month is based on the figure announced for the previous month. Had you bought at any time in May your starting point would have been 220.7 which was the position of the RPI announced on 20 April for March.

On 18 May the figure for April was released showing the RPI had risen by 0.95% to 222.8. So that gives the impression that by investing in May you'd already have 0.95% in the bag but that's not strictly true as it's still possible the RPI could fall back again. In Sept 2008 the RPI stood at 218.4 but fell back to 210.1 by Jan 2009 due to the temporary reduction of VAT and other factors.

Incidentally, you could have bought certificates on the internet up to midnight yesterday which would have been dated for May. The starting RPI figure for certs issued in June will be 222.8 - the figure for April announced on 18 May.

Yes, I didnt have the money in my account till this morning so couldnt buy last night...
So, in a nutshell, might I have been better off investing last night?

And, either way, if I only keep the certificates for one year am I likely to make more than in the of the derisory accounts currently around? I am basic rate tax payer. I know I cannot know for sure but I just dont understand how it all works although my understanding is that inflation is likely to fall back - in which case all I can get is the .85% or .75% (whatever it is - havent the figures in front of me)
thanks

Rollinghome

moneylover wrote: »

Yes, I didnt have the money in my account till this morning so couldnt buy last night...
So, in a nutshell, might I have been better off investing last night?

And, either way, if I only keep the certificates for one year am I likely to make more than in the of the derisory accounts currently around? I am basic rate tax payer. I know I cannot know for sure but I just dont understand how it all works although my understanding is that inflation is likely to fall back - in which case all I can get is the .85% or .75% (whatever it is - havent the figures in front of me)
thanks

Yes, you would have probably had an edge by investing last night. You could wait until the May RPI is announced in a couple of weeks time and there might be a similar position again.

As you say, it all depends on what happens from here. If there's an increase in VAT or the pound is allowed to depreciate further those would be upward pressures on inflation. If there's an increase in unemployment or a continuation of world recession that would be a downward pressure. If the rate of inflation increases, the BoE may be reluctant to increase interest rates to choke it off for fear of the 'double-dip' and allow it to rise above target.

If the RPI is 2% higher in 12 months, for 3 year certs you'd get 2% + 0.85% with no tax payable. So that would be equal to 3.56% for a standard rate tax payer in a taxable bank account. It's also possible of course that savings rates for bank could rise slightly, just to complicate your calculations.

The short answer is that IL certs could be a fair bet for the next year or so.

Sceptic001

moneylover wrote: »

Yes, I didnt have the money in my account till this morning so couldnt buy last night...
So, in a nutshell, might I have been better off investing last night?

And, either way, if I only keep the certificates for one year am I likely to make more than in the of the derisory accounts currently around? I am basic rate tax payer. I know I cannot know for sure but I just dont understand how it all works although my understanding is that inflation is likely to fall back - in which case all I can get is the .85% or .75% (whatever it is - havent the figures in front of me)
thanks

When you say "inflation is likely to fall back" it is important to understand exactly what you mean. There has been much confusion on this forum recently. If you mean that the inflation rate falls back to a lower rate than the current level (5.3% using RPI), then you still get index-linking at that rate (eg. 3%).

If you mean that prices actually fall in absolute terms (ie. that the RPI figure is less than the current level of 222.8) then you only receive the interest (1% AER if held for full 3 or 5 year term) in that annual period. This happened in several months last year when the dramatic fall in mortgage rates caused the RPI to fall in absolute terms.

Some people seem to be under the misapprehension that they get no index-linking if the rate of inflation is less than last year. This is simply not the case.

JackyX

I've been reading this thread and many people correctly point out that past performance of the UK Retail Price Index (RPI) cannot be assumed to reflect future performance of the RPI.

I did not see any reference to the existence of financial instruments (called consumer price index "swaps") which allow financial institutions or investors to pay out a fixed interest rates to a third party during a pre defined period of time and receive the UK RPI in exchange. These instruments are openly traded and the fixed rates that these investors are prepared to pay out in exchange for RPI can be obtained on a Reuters or Bloomberg terminal (if you have access to a Reuters terminal, type ICAPINFLATION).

I checked rates on the Reuters terminal today and the fixed interest rate that the market is prepared to pay out in exchange for receiving the UK RPI during a three-year period is 3.0475% per annum. The rate for a five-year period is 3.1775%. I realise that the RPI component payable on the NS&I Index Linked Certificates have a "floor" at 0%. As far as I'm aware, the rates found on Reuters that I mentioned above are based on receiving RPI without a "floor" at zero percent (i.e. if RPI is ever negative, then it would have to be paid out by the party which elected to receive RPI in the transaction). If those instruments listed on Reuters had a floor at zero percent, the fixed rate at which a transaction would be struck would be higher than those I've mentioned.

When thinking about the expected returns from those Index Linked Certificates, I assume that based on market expectations, the three year bond should return in excess of 4.0475% pa. and the five year bond should return 4.1775% pa. Of course, this is net of taxes. The five year expected return gross of taxes (which is how all other savings products out there except ISAs are quoted) for the five year Certificate is 8.355% p.a. if you are a 50% tax payer, 6.9625% for 40% tax payers, 5.2219% for 20% tax payers, etc. And all this for investing in a product which is fully protected by the UK government, fully liquid, etc. My personal conclusion: this investment product is a total no brainer!

Sceptic001

Thanks, JackyX. That makes for a very interesting comparison with the Bank of England's hope that the Consumer Prices Index (currently rising at 3.7% per annum) will fall back to 2% next year!

JackyX

Sceptic001 wrote: »

Thanks, JackyX. That makes for a very interesting comparison with the Bank of England's hope that the Consumer Prices Index (currently rising at 3.7% per annum) will fall back to 2% next year!

Indeed! Printing money right left and centre the way our government does, the markets clearly don't seem to believe the BOE will be able to achieve this (especially since they don't really seem prepared to raise interest rates..).

JamesU

Very interesting. I am far more inclined to believe market expectation than government forecasts....

JackyX, Do you have any values for the ICAP RPI derivative mentioned for the months of Dec 09, Jan 10, Feb 10, Mar 10, Apr 10? Would be interested to see how any variation compares with mth/mth change in RPI.

JamesU

JackyX

JamesU wrote: »

JackyX, Do you have any values for the ICAP RPI derivative mentioned for the months of Dec 09, Jan 10, Feb 10, Mar 10, Apr 10? Would be interested to see how any variation compares with mth/mth change in RPI.

JamesU

Sorry James - I looked but unfortunately it does not appear that historical data is available for these instruments on the Reuters terminal. I don't know if it's available on Bloomberg as I don't have access.

I'm sure ICAP, which is the broker providing the info to Reuters for this, would have this data available. However I don't expect they would freely provide this unless perhaps its a potential institutional client calling them up.

JamesU

JackyX wrote: »

Sorry James - I looked but unfortunately it does not appear that historical data is available for these instruments on the Reuters terminal. I don't know if it's available on Bloomberg as I don't have access.

I'm sure ICAP, which is the broker providing the info to Reuters for this, would have this data available. However I don't expect they would freely provide this unless perhaps its a potential institutional client calling them up.

Thanks for looking. Checked various sources also yesterday without success, and ICAP itself scant. Barclays have an overview, link on this below, but a little too technical really. And no merit relative to ILCs. I guess best to just monitor changes in RPI monthly as the data comes through.

http://www.classiccmp.org/transputer/finengineer/%5BBarclays%5D%20Inflation%20Derivatives%20-%20A%20User%27s%20Guide.pdf

JamesU