NS&I Index-Linked Savings: Q&A

StevieJ

Yes that calculation looks OK. Why are you complicating it, what is an averge from Nov07 to Oct 08
got to do with it? It is simply an index . Why 214.1? the index has never been at 214.1. Note if the index goes zero
on 12 month anniversary you treat as 0% inflation not minus.
BTW I presume you mean 217.9 in Jan 10 at end of year 2 in your calculation.?

Here is the index

http://www.wolfbane.com/rpi.htm

lisyloo

If it's increasing, then yes.

JamesU

StevieJ wrote: »

Yes that calculation looks OK.

Thanks.

Why are you complicating it, what is an averge from Nov07 to Oct 08
got to do with it? It is simply an index . Why 214.1? the index has never been at 214.1.

I chose 214.1 as the average of the 12 months RPI just prior to the deflationary period as a random example that was more reasonable that the lower RPIs during the deflationary period, to illustrate how the interest rate on the certificates would vary depending on the RPI in the month of purchase and for no other reason. Sorry if this complicated things.

Note if the index goes zero on 12 month anniversary you treat as 0% inflation not minus.

Understood

BTW I presume you mean 217.9 in Jan 10 at end of year 2 in your calculation.?

No, this was intentional to illustrate the extreme where there would be no interest. ie. RPI value in Jan 09 = RPI value in Jan10

Here is the index

Thanks, have this already.

http://www.wolfbane.com/rpi.htm

JamesU

JamesU

lisyloo wrote: »

If it's increasing, then yes.

Not sure what you mean by this.

JamesU

ManAtHome

You can't really 'lock in' when inflation is low - absolutely no guarantee that it will leap upwards from a low number or plummet from a high number. What you can do is calculate how much inflation you need to make IL certs a good or bad deal.

So, if you compare against a 1 year fixed rate at 3%, you 'need' RPI of 1.55% to break even as a standard-rate taxpayer (3% fixed returns 2.4%, IL returns RPI+0.85% tax-free).

For anything over a year, you have to take 'get out' payments into account - nothing for the IL certs, anything between a months interest and 'no chance' for fixed-rate savings.

DiggerUK

This is the formula used by NSI. It is taken from last weeks Telegraph.

"Purchase price x RPI end level (which in January 2010 was 217.9), divided by RPI start level (which in January 2009 was 210.1). Or 10,000 x (217.9 ÷ 210.1) = £10,371.25. "

Full article: http://www.telegraph.co.uk/finance/personalfinance/savings/7448715/NSandI-Index-Linked-Savings-QandA.html

john_s_2

ManAtHome wrote: »

You can't really 'lock in' when inflation is low - absolutely no guarantee that it will leap upwards from a low number or plummet from a high number. What you can do is calculate how much inflation you need to make IL certs a good or bad deal.

I would just say that at the beginning of your 'investment period' you don't know what's going to happen to inflation (as you state above). But with an NSI IL cert you DO know that it will grow with inflation (as measured by RPI). You don't have that guarantee with a regular fixed-rate product from a bank / Building Society.

That guarantee is worth something - and is worth bearing in mind at the end of your investment period when, with the benefit of hindsight of course, you can tell whether you could have got more in a different product.

For me, a savings account should protect my cash from inflation (and loss, theft, accident). Once it's done that job, anything else is a bonus, and hunting around for something better is entering into the murky world of 'investments'.

Of course, up till a couple of years ago, having the Government, and BoE, resolving to keep CPI inflation at 2% meant that I could be fairly confident when looking at savings products into the short term future. I don't have that confidence at the moment.

lisyloo

Not sure what you mean by this.

You ran an example where the figures increased and extrapolated a conclusion from that.

JamesU

lisyloo wrote: »

You ran an example where the figures increased and extrapolated a conclusion from that.

The monthly % RPI explains what happens in the past but does seem to give meaningful information on what to predict. I am also not sure if using % RPI is correct for comparing the best option between index linked certificates and savings accounts. Following the changes in RPI seems more reliable.


Previous example 1:

RPI = 217.9 in January 09 (hypothetical)
RPI = 217.9 in January 10 (real)
Predicted return at end of Year 1 = 0.85% (1st year bonus only)

Why? No change in RPI differential


Previous example 2:

RPI = 214.1 in January 09 (hypothetical, 12mth average of RPI prior to deflation)
RPI = 217.9 in January 10 (real)
Predicted return at end of Year 1 = 2.59%
2.59% from certificates at end of Year 1

Why? Change in RPI differential


Looking at changes in the RPI rather than % RPI with real ONS data.

Over the last 3 years, the best time to invest was in July 2007:

July 2007: RPI = 206.1, % RPI = 3.8%
July 2008: RPI = 216.5, % RPI = 5.0%
% Year 1 return = 5.9% (assume change in RPI + 0.85%)

Why the best return?
Highest RPI differential over 12mths in the 3yr period.
Note: Best return, for sure, “hindsight is a great thing.”


Over the last 3 years, the start of the worse time to invest was in Feb 2008:

Feb 2008: RPI = 211.4, % RPI = 4.1%
Feb 2009: RPI = 211.4, % RPI = 0.0%
% Year 1 return = 0.85% (assume change in RPI + 0.85%)

Why was this the start of the worst returns?
Dramatic slowing of RPI
Lowest RPI differential in 12mths in the 3yr period.
Note: start level % RPI is 4.1% but no interest


A deflationary “hangover”? How to predict what to do or not to do?

December 08 RPI = 212.9, %RPI =- 1.4
January 09 RPI = 210.1, %RPI = -1.3
February 09 RPI = 211.4, %RPI = 0
March 09 RPI = 211.3, %RPI = -0.4
April 09 RPI = 211.5, %RPI = -1.2
May 09 RPI = 212.8, %RPI = -1.1

December 09 RPI = 218 % RPI = 2.4%
January 10 RPI = 217.9 % RPI = 3.7%


Example outcomes this March:

February 10 RPI = 216 % RPI = 2.2%
February 10 RPI = 218 % RPI = 3.1%
February 10 RPI = 220 % RPI = 4.1%


The RPI has been constant in December and January, so is there inflation?

The RPI is constant, but %RPI = 2.4% (Dec), 3.7% (Jan) and 3.1% (Feb IF the RPI does not change). So how is it possible to rationalise the best time to buy index linked certificates? Should this really be rationalised using %RPI, or is it not more correct to consider RPI which is constant and also the starting level for the investment anyway?

If the RPI were to stay the same in March figures, inflation will decrease to 3.1%. But RPI is constant.

Surely these variations in %RPI are just misleading due to the low RPI during the deflationary period?


JamesU

StevieJ

The only rationale I can put on this is that you are taking the pxxx