National Counties launch index linked ISA

gt94sss2

National Counties Building Society is offering a five-year ISA that pays annual interest of 1% plus the change in inflation as measured by the retail prices index (RPI).

The group is the only savings provider to offer consumers an account with an inflation guarantee after the Government-backed National Savings and Investments pulled all of its index-linked products last month.

The product is open to both new savers and those wanting to transfer money they have built up in ISAs in previous years.
But people must deposit a minimum of £5,100 - the whole of this year's ISA allowance - and they cannot add to the money during the term of the investment or withdraw their cash. Under the terms of the product they will receive interest of 1% a year plus September's RPI change.

If RPI remains at its current rate of 5% this would give an annual return of 5.82% on an AER basis. Even if RPI becomes negative, as it was for much of 2009, savers will still receive a return of 1% a year.

John Milton, chief executive of National Counties, said: "We wanted to give people the opportunity to protect their funds against inflation. We think it is attractive at this time, particularly as National Savings and Investments has withdrawn its products."
The product will be available until September 30, however there is limited availability so it may close sooner if demand is high.

Media coverage here and here

Full details on National Counties website

Regards
Sunil

Reaper

Sounds a good deal to me. The Telegraph makes a good point for those comparing it with other cash ISAs on the market:

He said the closest competitor was a five-year fixed-rate cash Isa from Birmingham Midshires paying 4.25pc. "This account will pay more interest overall than the National Counties Isa if inflation averages less than 3.25pc over the five years," he said. "If it averages more than that you will be better off with the new index-linked Isa."

So it all depends on what you think inflation will do.

Mickygg

Hmmmm I'm not too sure about this one. For the NS&I one the attraction to me was tax free, and I know this is as well but then ISA's abviously are anyway.

If you can lock away for 4 years at 4% and 5 years a bit more, I personally wouldn't want to risk inflation decreasing over the next few years when you can lock away now at those rates.

Having said that, it is a good thing to have as an overall savings choice to avoid inflation erosion. This must be attractive to some people, especially those who could not take advantage of the NS&I ILSC.

steady__eddie

I am a little wary about this one. My last foray into index linking was with Leeds and at one stage I was almost forced into a rapid change of underwear but it didn't turn into a complete catastrophe.
"An excellent return of 9.27% Tax free over the two year term / 4.64% AER". (Their quote, not mine).

wriggly

Although it sounds similar to the withdrawn NS&I bonds, it has a few significant differences:

1. cannot withdraw during the 5-year period - NS&I bonds can be accessed at any time, and after 1 year, benefit from inflation-linking.

2. inflation-linking is added at the end of the 5 year term
a) no benefit from the compounding of inflation-linked interest
b) no "highwater mark" - with NS&I bonds each anniversary sets a new guaranteed minimum. If over the next 5 years, we have some deflation followed by inflation (or vice-versa) an NS&I bond would do significantly better than this offer.

As an example of 2b), if over the next few years RPI gradually drops from 220 to 200 on say the 2nd anniversary, before rising back to 220 on the 5th anniversary, an NS&I bond would (to some extent) ignore the deflation but add the 10% rise in RPI - this offer would give you 0% inflation-linking (220 - 220=0% change).

cepheus

wriggly wrote: »

Although it sounds similar to the withdrawn NS&I bonds, it has a few significant differences:

1. cannot withdraw during the 5-year period - NS&I bonds can be accessed at any time, and after 1 year, benefit from inflation-linking.

Actually you can withdraw, but the indexing interest is lost. I think this means you just get 1%

http://www.ncbs.co.uk/UploadedFiles/2nd-Issue-Index-Linked-Cash-ISA-Product-Pack.pdf?&sID=779

gb01_2

I'm at a loss to understand this deal.

The return over the 5 year term is said to be 1 pcpa plus the CHANGE in inflation (from that at the beginning of the term to that at maturity in September 2015).

So, if the RPI in Sept 2015 is equal to or less than the current RPI (which I understand to be 5 pc), one would gain a return at maturity of 1 pcpa over the period, or a total of 5 pc on the investment.

If perchance the RPI in Sept 2015 (whatever value(s) it may have in the interim) is, say, 6.5 pc; then in addition to 1 pcpa over the term (=5 pc total), one would receive a further 1.5 pc only.

Yet National Counties is reported to have stated:
"If RPI remains at the current level of 5 pc, savers will receive interest equivalent to 5.82 pcpa at the end of the 5 year term".

I'm perplexed.

Sceptic001

gb01 wrote: »

I'm at a loss to understand this deal.

The return over the 5 year term is said to be 1 pcpa plus the CHANGE in inflation (from that at the beginning of the term to that at maturity in September 2015).

What matters is the change in the Retail Prices Index, which is not the same thing as the change in the annual (or in this case 5-year) inflation rate, which is expressed as a percentage.

The current RPI is 223.6. The RPI 5 years from now is of course unknown, but if this product had been launched 5 years ago (when RPI was 192.2) the 5-year inflation-linked return today would have been 16.3% (plus their 1% AER fixed rate), reflecting the change in prices over 5 years and ironing out all the ups and downs.

I am a pessimist on inflation over the next two years, but since there is no index-linking unless you stay in for 5 years this limits the appeal of this product.

gb01_2

Thanks for that.
I've now spoken by telephone with ncbs, who have clarified the position.

The deal is:
1. Guaranteed 1 pcpa return, credited annually (in Oct.) & hence compounded; plus
2. One-off payment at maturity (30.09.15) of an indexation sum if (& only if) the RPI figure to be published by the ONS in Aug. 2015 exceeds that published in Aug. 2010.

While that indexation sum (if any) necessarily resides in a crystal ball until Aug. 2015; the illustrative example given by ncbs of "3.96 pc AER tax free" computed on the basis of the increase in RPI experienced between July 2005 & July 2010, as a one-off payment of that amount, would serve in effect to enhance the guaranteed 1 pcpa by less than 1 pcpa (3.96 divided by 5); so the real return on capital initially invested would amount to less than 2 pcpa.

So NOT the inflation-buster which ncbs has promoted in terms which appear to have been misconstrued by the various financial experts/press.

C_Mababejive

Behind every scheme theres' a schemer..!

alanq

gb01 wrote: »

Thanks for that.
So NOT the inflation-buster which ncbs has promoted in terms which appear to have been misconstrued by the various financial experts/press.

At the end of 5 years you get back more than you put in adjusted for any increase in RPI. I call that inflation busting. The terms are not as good as those which would have been available with ILSC but no one, as far as I am aware, has claimed that they are.