MSE News: Inflation-beating savings return

Sceptic001

Arthurian, I have re-calculated your figures as follows:

Arthurian wrote: »

"How do I calculate the percentage change in prices between two periods in time?

Data from table 5.1 or 5.3 of 'Focus On Consumer Price Indices' should be used with this formula:

[(Later date RPI - Earlier date RPI)/ Earlier date RPI]x100 "

So for the period Aug 2005 (RPI 192.6) to Aug 2010 (RPI 224.5) that would have been
[(224.5 - 192.6)/[STRIKE]224.5[/STRIKE] 192.6] x 100 =
(31.9/[STRIKE]224.5[/STRIKE] 192.6) x 100 = 16.56

So that makes 16.56% over those five years plus 50% of 16.56 = 8.28
Total return would have been 24.84% over those five years.

...

Your percentage is out because you divided by the new RPI instead of the old RPI. The AER using the corrected figure of 24.84% over 5 years is 4.54%, as NCBS state, although Milarky correctly notes that there is a period before the start of the fixed term where they only pay 1.46% AER, thus reducing the actual overall return.

Arthurian

Thanks, Sceptic. Told you I was hopeless at maths! :beer:

D1zzy

As far as I can see from a quick look, this is a spot bet - and only pays out if the index applicable in the month of maturity is greater than the index at the start -irrespective of what happens inbetween.

So even if the trend were to be up over 5 years (too long for even an educated guess!) -if it drops below the starting index in that final month you lose! (Or am I completely misunderstanding?)

• indexation start date: 1 December 2010
• Maturity date: 1 December 2015 -

NSI certificates calculated Interest on an annual basis - so at least on a five year fix you had 5 shots at winning, and you could withdraw after 1 year if it looked like you'd got it wrong

alanq

You don't lose you just don't get the gains you would have got if the index had not dropped.

You are guaranteed at least an additional 7.5% (gross) of your original investment .

D1zzy

alanq wrote: »

You don't lose you just don't get the gains you would have got if the index had not dropped.

You are guaranteed at least an additional 7.5% (gross) of your original investment .

7.5/5 = 1.5 pa - that's losing in my book!

Why would you go for that when you can get significantly more with a standard fix

Especially when even the "experts" can't even predict whether we are in for Inflation or deflation, let alone what the numbers might be, and your chance of earning more than 1.5% is dependent on a single month's figure!

EalingSaver

D1zzy wrote: »

As far as I can see from a quick look, this is a spot bet - and only pays out if the index applicable in the month of maturity is greater than the index at the start -irrespective of what happens inbetween.

All very true. However do you really expect the index i.e. prices to be lower in 5 years time than it is today (sic: actually 1/12 of course) ? I think you would be very hard pressed to find ANY 5 year period over the last couple or more decades, or much further back, where that was the case.

Of course its not as good as the NS&I, particularly for taxpayers. But if what you are genuinely looking for is inflation protection - then I would have thought it was a pretty inflation hedge.

musehead

D1zzy wrote: »

7.5/5 = 1.5 pa - that's losing in my book!

Why would you go for that when you can get significantly more with a standard fix

Especially when even the "experts" can't even predict whether we are in for Inflation or deflation, let alone what the numbers might be, and your chance of earning more than 1.5% is dependent on a single month's figure!

It's not "losing" in terms of protecting your capital from inflation. With this product you're 100% guaranteed to stay ahead of inflation. A 1.5% PA return is not bad if inflation is 0% over the time period.

If you go for a normal 5 year fix at say 4.5% APR, you will lose money in real terms if inflation is higher than your fixed return after tax.

I'd say it's an excellent product if you have a pile of cash that for whatever reason you want to keep as cash but can afford to set it aside for 5 years.

D1zzy

musehead wrote: »

It's not "losing" in terms of protecting your capital from inflation. With this product you're 100% guaranteed to stay ahead of inflation. A 1.5% PA return is not bad if inflation is 0% over the time period.

If you go for a normal 5 year fix at say 4.5% APR, you will lose money in real terms if inflation is higher than your fixed return after tax.

I'd say it's an excellent product if you have a pile of cash that for whatever reason you want to keep as cash but can afford to set it aside for 5 years.

My real problem with this account is that the +"50%" is dependent on the index being up in 1 particular month out of 60 - irrespective of what happens to inflation during the 5 period, and the funds generated by the 1.5% a year for 5 years are well outstripped by say a current 3year fix @ 4%.

EalingSaver

D1zzy wrote: »

My real problem with this account is that the +"50%" is dependent on the index being up in 1 particular month out of 60 - irrespective of what happens to inflation during the 5 period, and the funds generated by the 1.5% a year for 5 years are well outstripped by say a current 3year fix @ 4%.

Either I'm misunderstanding your concern or you are misunderstanding the way this works.

It looks to me as if you are confusing the oft quoted by the media (i.e. every month when it is published) "RPI" number, which is actually NOT the RPI at all, but rather the %age change in the RPI compated with 12 months ago.

This account - just like the NS&I product - is based on the Retail Price Index values. So if inflation (as measured by the RPI) generally increases over the 5 year period i.e. prices are higher at the end of 5 years than they were at the start you are in +ve territory. That is what the RPI measures. If there happens to be a drop in the ANNUAL RPI CHANGE in the month or last couple of months before it matures then so what? i.e. the annual RPI change in the month of maturity could be 1%, 2% -5%, its irrelevant. What matters is what has happened to inflation IN TOTAL between start and end date.

The difference from the NS&I product is that it used to calculate and lock in on each anniversary date.

D1zzy

EalingSaver wrote: »

Either I'm misunderstanding your concern or you are misunderstanding the way this works.

It looks to me as if you are confusing the oft quoted by the media (i.e. every month when it is published) "RPI" number, which is actually NOT the RPI at all, but rather the %age change in the RPI compated with 12 months ago.

This account - just like the NS&I product - is based on the Retail Price Index values. So if inflation (as measured by the RPI) generally increases over the 5 year period i.e. prices are higher at the end of 5 years than they were at the start you are in +ve territory. That is what the RPI measures. If there happens to be a drop in the ANNUAL RPI CHANGE in the month or last couple of months before it matures then so what? i.e. the annual RPI change in the month of maturity could be 1%, 2% -5%, its irrelevant. What matters is what has happened to inflation IN TOTAL between start and end date.

The difference from the NS&I product is that it used to calculate and lock in on each anniversary date.

No - I do understand the difference between the Index and the %rate- but since there are definite concerns about a period of deflation - there is a possibility of say 3 years of inflation followed by 2 years of deflation the index would then fall - but I agree (having now looked at the figures thanks -http://www.statistics.gov.uk/statbase/tsdataset.asp?vlnk=229&More=N&All=Y)there would need to be a period of decline for the index to drop not just a single wayward month.