NS&I Saving Certificates

lindabea

A question regarding the interest rate for the index-linked certificates. If the RPI is 3.4% (I think that's the current rate), and assuming there is no change in the RPI during the next 3 years, (just to illustrate my point), am I right in thinking that the capital invested will earn an interest rate of 3.4% + 1% over the 3 years. Can someone please explain how the interset rate is worked out as I am completely confused with this type of investment.

Sceptic001

NS&I use RPI not CPI. Today's RPI figure is 4.4%. In the (unlikely) event that RPI increase is 4.4% for each of the next three years you would indeed receive 5.4% per annum (compounded, tax free), making index-linked certificates very attractive for anyone who thinks inflation is here to stay.

JamesU

lindabea wrote: »

A question regarding the interest rate for the index-linked certificates. If the RPI is 3.4% (I think that's the current rate), and assuming there is no change in the RPI during the next 3 years, (just to illustrate my point), am I right in thinking that the capital invested will earn an interest rate of 3.4% + 1% over the 3 years. Can someone please explain how the interset rate is worked out as I am completely confused with this type of investment.

The current rate as of today is %RPI = 4.4% but this refers to previous 12months and is not the rate you will get in the next 12 months.

It can be confusing. Read through the link here, including some worked examples towards the end (e.g. my post 86 in the thread).


http://forums.moneysavingexpert.com/showthread.html?t=2340725


Also worth reading through:

http://forums.moneysavingexpert.com/showthread.html?t=2382861


Hope these help to clarify.

JamesU

amcluesent

>I am completely confused with this type of investment.<

Your best bet is to d/l the Excel spreadsheet from the NS&I web-site that shows how the index (which was baselined at 100 in 1947) ticks up month by month (assuming RPI is +tive) and how that index (not any months RPI %tage) is used to calculate the return on the bonds.

Any discussion on index-linking needs a comment that the BoE staff pension fund is heavily invested in index linked and the LibLab pact govt in 1977 saw inflation spiral to 25%!

LongTermLurker

lindabea wrote: »

A question regarding the interest rate for the index-linked certificates. If the RPI is 3.4% (I think that's the current rate), and assuming there is no change in the RPI during the next 3 years, (just to illustrate my point), am I right in thinking that the capital invested will earn an interest rate of 3.4% + 1% over the 3 years. Can someone please explain how the interset rate is worked out as I am completely confused with this type of investment.

I'm not sure if this has been missed, or if I'm wrong, but JamesU has touched on it with "this refers to previous 12months and is not the rate you will get in the next 12 months."

If there is no change in the RPI, then Index Linking would be zero%, add on 1% and you would get 1%?

Is that right? Do you get the RPI figure, or the change in RPI (i.e. the amount of inflation)? Plus 1%, of course...

Edit - Masomnia has answered this here http://forums.moneysavingexpert.com/showpost.html?p=30928695&postcount=24 (thx JamesU for the page link)

RPI is an index, and it is represented by a number, it starts in June 1947 as 100, and then as prices rise the indexation number rises with it. So the change in the index number between years is what is represented by the percentages. This is what is meant by 'change' in RPI, not the difference between the percentages, but the change in the index, as is represented by the percentage.

JamesU

LongTermLurker wrote: »

I'm not sure if this has been missed, or if I'm wrong, but JamesU has touched on it with "this refers to previous 12months and is not the rate you will get in the next 12 months."

If there is no change in the RPI, then Index Linking would be zero%, add on 1% and you would get 1%?

Is that right? Do you get the RPI figure, or the change in RPI (i.e. the amount of inflation)? Plus 1%, of course...

Edit - Masomnia has answered this here http://forums.moneysavingexpert.com/showpost.html?p=30928695&postcount=24 (thx JamesU for the page link)

LongtermLurker, Yes, you are right.


Example posted for last month:
Start date of 3yr certificates Feb 2008:

Feb 2008: RPI = 211.4, % RPI = 4.1% (NOT the starting interest +1%)
Feb 2009: RPI = 211.4, % RPI = 0.0% (hence no interest, deflation)
(where 211.4/211.4 = 1.0000 equiv to %RPI = 0%)
(OR, alternatively, (211.4-211.4)/211.4*100 = 0%)

% Year 1 return = 1% (assume change in RPI + 1%)

Feb 2009: RPI = 211.4, % RPI = 0%
Feb 2010: RPI = 219.2, % RPI = 3.7%
(where 219.2/211.4 = 1.0368 equiv to %RPI = 3.7%)
OR, alternatively, (219.2-211.4)/211.4*100 = 3.7%)

% Year 2 return = 4.7% (assume change in RPI + 1%)

Feb 2010: RPI = 219.2, % RPI = 3.7%
Feb 2011: RPI = XXX, %RPI = X%

% Year 3 return = X%

The interest you receive is the change in RPI + 1%, year on year as in the calculations above (really + 0.85%, 0.95%, 1.21%). Note: these figures are only for February, different figures for other months. Note also: THIS DOES NOT MEAN that the ILCs are now returning 4.7%, they are not. This % return in Year 2 was due to the low RPI = 211.4 during start of deflation relative to today's Feb 2010 RPI figure of 219.2. The % return in Year 3 will depend on the RPI value in Feb 2011.

Hope this helps.

JamesU

EalingSaver

They should change the nomenclature and use RPI to refer to the INDEX, and RPIC (or something) to refer to the %age change relative to 12 months previous. That would stop a lot of the confusing c**p that gets people when everyone talks about the RPI figure.

Gorgeous_George

I'm posting my first NSandI index linked application tomorrow. My guess is that inflation will rise faster than interest rates.

ETA: Better still, just applied online - very easy.

GG

lindabea

This sounds like really complicated stuff, but many thanks to Jamesu for your explanation. I think I have a better understanding now, but still not completely sure. So if I were to invest in April 2010, the start RPI (SRPI) will be published in May 2010. Then I would have to wait until May 2011 for the end RPI (ERPI). To calculate the return on my investment of say 10K, the formula would like like this:

10K* ((ERPI-SRPI)/SRPI*100) + 1%

I don't know what 0.85, 0.95 and 1.21 mean, but i have seen these figures in the NS&I website and Jamesu also made references to them. Can someone please explain further and am I right in my understanding.

Gorgeous_George

Telegraph Link

GG

Lansdowne

If you invest in April the SRPI will be the value published in March which relates to prices in February which is 219.2.

If the index 12 months later the index is (say) 228.5, that would be a 4.24% inflation.

((ERPI-SRPI)/SRPI*100) = 4.24

or the same thing another way (ERPI/SRPI)-1 = 0.0424

Your interest for the year will be 4.24 plus 0.85 = 5.09%.

The certificates have a three year term, year 1 you get +0.85, yr 2=0.95, yr3=1.21, total over the 3 yrs avreages to +1.00%.