Index Linking For Dummies...

Joey122

JamesU wrote: »

Joey122, I am not sure how you managed to cut and paste post 45 above but this is not my original posting (see posts above) and please note I am not suggesting you can expect a future return of 4% if you buy index linked certificates right now.

If you buy index linked certificates, there is no guarantee that you will receive 4% interest after 12 months.

Just because returns were 3-4% previously, and as high as 5.4% recently, this does not mean they will be between 3-4%, in the future. The returns could be lower and they could be higher. Certainly up until July of this year, and possibly through to November, the rates might be higher than usual, but these returns are for investments made 12 months ago during a period of deflation, and are not the rates to expect if you are investing right now.

Finally I do not know if %RPI will be around an average of 3%. Any economic forecasts predicting an average %RPI of 3% in the next year or so are just that i.e. economic forecasts. They are difficult to produce, are normally not too far off the mark, but have to be taken with a pinch of salt. At this point in time, given the unprecedented economic circumstances and the current political situation, in my personal opinion, these forecasts should not be relied upon, and should be taken with a glass of whisky.


JamesU
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James - By my calculations at the moment someone earning 3% interest a year is really at 2.4% after tax

If RPI was at least 1.4% then you would be better off taking the index linked notes - I just cant understand why we cant agree on that??

amcluesent

Cost of shirts, blouses and underwear to rise as cotton prices soar

More rising prices in imported goods to add to the cost of fuel! Manufacturing input prices are now rising at something like 7%, the BoE rate should be closer to 4% now not 0.5%. Looks like the UK monetary policy is of a 'soft default' by keeping a gap of 4% between inflation and saving returns.

NS&I index linked should be 15-20% of your portfolio IMHO

StevieJ

Joey122 wrote: »

James - By my calculations at the moment someone earning 3% interest a year is really at 2.4% after tax

If RPI was at least 1.4% then you would be better off taking the index linked notes - I just cant understand why we cant agree on that??

Or 1.8% for HR tax payers.

sabretoothtigger

The 1% extra interest only applies if you hold it for three years but I think we can agree if buying that 3 years of high rpi is quite likely. If you cash in after the first year they dont pay the full 1%

JamesU

Joey122 wrote: »

James - By my calculations at the moment someone earning 3% interest a year is really at 2.4% after tax

Yes. 2.4% for a 20% taxpayer

Joey122 wrote: »

“From what I ve read you can invest 15K in each 'issue' at 1% + RPI tax free - This makes tpdays RPI rate 5.4%”

“So we all expect RPI to be about 3% - Given that the IR rate would be 4% (RPI + 1%) tax free I really cant see why people do not buy these”

A common mistake is to mix up %RPI (change in RPI over 12 months) and the RPI (RPI index). The current %RPI tells you what happened with inflation in the last 12 months, and it is meaningless to use this figure for working out what % return you are likely to receive in the next 12 months.

Joey122 wrote: »

“If RPI was at least 1.4% then you would be better off taking the index linked notes - I just cant understand why we cant agree on that?”

Because you are using %RPI and not the differential between start RPI and the end RPI.

JamesU

arjar

It seems to me that historic RPI rates are irrelevant to an investment decision for this product. One might even say that future rates matter little either, as the most important features of NS&I i-l certificates are (1) the certainty that you beat inflation by the guaranteed rate (currently 1%) above the RPI index change, whatever happens, and (2) that this return is tax free.

This certainty is an important quality for people relying on overall growth to maintain their capital (or, at the end of the term, take a 'dividend').

Whether this guaranteed return is or is not beaten over the term by unguaranteed products is, of course, unpredictable. For what it's worth, my judgement is that the tendency of the industry to devalue ISAs to the point that they meaningless in terms of tax benefit, and the 'pump and dump' tactics of virtually all providers (:mad:) makes any guaranteed return above inflation valuable whatever RPI rates turn out to be.

JamesU

People get confused with ILCs, what interest rate can be received from them and how the interest is calculated. The data in the spreadsheet is an easier way to explain how they work and unfortunately you need historical data and a few examples of calculations to do this properly. A lot of this confusion is described at the end of this message.

JamesU



MSE Martin and ILCs - Currently (incorrect)
Inflation Beating Guarantee
[STRIKE]RPI + 1% tax free (currently 5.4%) [/STRIKE]Government-run savings organisation, NS&I, has 3 and 5 year Index Linked Savings that pay 1% more than inflation, the rate at which prices increase. It uses the higher measure, Retail Prices Index (RPI) inflation, [STRIKE]at 4.4%, meaning it currently pays 5.4% overall. [/STRIKE]

NSI and MSE’s incorrect rates:
Danny_28: I was logging on to report that the explanation for Index Linked Savings Certificates on the savings pages of this site is incorrect, then saw this post. I work for the Post Office as a Financial Specialist.......... This is completely untrue and misleads the public, exactly the sort of thing that this website is supposed to prevent.
The certificates pay 1% fixed, and then the difference between the RPI on the date of opening the account and the RPI in 12 months time. Therefore, with the example of last year, inflation went down and so only 1% was received. It is important to note that the rate received was not 1% plus RPI. This distinction is extremely important as to lead customers to believe that they are guaranteed 1% plus the RPI figure is completely misguided and incorrect, it also means that customers are predisposed to an account which I know is wrong for them but cannot advise them of such - they trust Martin, not me.

https://forums.moneysavingexpert.com/discussion/2340725

Danny_28, NSI, 22nd March 2010

StevieJ

JamesU wrote: »

Arjar, in a previous thread I was burnt at the stake for heresy when discussing ILCs and for sure, I anticipate the same will happen again on this thread.

I know you mean well but your elaborate explanations only confuse IMHO the explanation by arjar is adequate with two extra points to be included, (a) if you cash in within the first 12 months you simply receive your money back (b) the 1% is only the full 1% if you hold for the full term.
I am pretty sure that most people who invest in an inflation proof product don't believe that is backward looking and the 4.4% RPI illustration is no different than putting your cash in a 5% variable ISA that has its rate reduced the very next day.

JamesU

StevieJ wrote: »

I know you mean well but your elaborate explanations only confuse IMHO the explanation by arjar is adequate with one extra point to be included, if you cash in within the first 12 months you simply receive your money back. I am pretty sure that most people who invest in an inflation proof product don't believe that is backward looking and the 4.4% RPI illustration is no different than putting your cash in a 5% variable ISA that has its rate reduced the very next day.

SteveJ, What is an IMHO? And I genuinely do not understand what you are trying to say in bold? The ILCs on offer do not have an interest rate of 4.4% +bonus?

JamesU

StevieJ

JamesU wrote: »

SteveJ, What is an IMHO? And I genuinely do not understand what you are trying to say in bold? The ILCs on offer do not have an interest rate of 4.4% +bonus?

JamesU

The 4.4% was from your post , IMHO means in my honest opinion, I am saying that most normal people know that if they are investing in inflation protection it is related to future inflation not past and the examples of RPI that are put up on the NS&I site are purely that and not a forward guarantee.

MSE Martin and ILCs - Currently (incorrect)
Inflation Beating Guarantee
RPI + 1% tax free (currently 5.4%) Government-run savings organisation, NS&I, has 3 and 5 year Index Linked Savings that pay 1% more than inflation, the rate at which prices increase. It uses the higher measure, Retail Prices Index (RPI) inflation, at 4.4%, meaning it currently pays 5.4% overall.