Beware the Post office inflation linked Bond

AndrewCotterill

Beware - You should note that the Post office inflation linked bond giving RPI+1.5% each year is only inflation linked not inflation proofed. Do not use this product if you think inflation will rise to high single digits or go to double digit inflation over the next few years.

The critical lines they don't really want you to understand is "The annual returns are locked-in but they are not payable until the Bond matures at the end of the term and they do not compound annually".

The problem is that as they do not compound, above a certain rate of inflation the lack of compound interest becomes important. As you dont receive the interest till the end, it becomes critical if inflation rises too much.

Lets see what happens if RPI goes to exactly 10% over the next few years. In each of years 1 to 5 for each £100 you invest in the post office inflation linked product you would get £11.50 return (10% + 1.5%). So at the end of the 5 years you will receive your £100 + £57.5 interest = £157.5. (You cant access any of the interest till the end.)

However if you were able to fully index your £100 pounds just at RPI (here we are taking 10%), year one it would be need to be £110, year two £121, year three £133.1, year four £146.41 and at the end of year 5, just to receive back your £100 indexed to inflation you would need to get back £161.05.

So if you had your money in the Post office index linked account + 1.5%/yr, you would have lost money in real terms. The break even point is if RPI is at 8.3%. Above this you lose. Note - it only matters what inflation is doing in years 2-5.

Note if we had ravaging inflation in the last four years at exactly 46.9% you would have lost half your money in real terms because the lack of compound on the interest if so critical.

So beware, this does not inflation protect your money at 'high' levels of inflation. It is merely linked to inflation. Just the sort of misleading sales pitch I would expect from the financial sector.

Does this constitute some kind of misrepresentation? I was thinking of signing up for it until I decided to put the figures into a spread sheet to see what their small print meant in real terms. I wonder how many will not realise the risk?

alanq

Already discussed in earlier thread.
https://forums.moneysavingexpert.com/discussion/3061154

newcastleneil

Thanks for your post Andy .I dont think I will bother with this bond now

meunier

Beyond this, the Post Office are in such administrative chaos you may potentially lose even more money waiting either to set your account up ... or getting it back to you. Post Office products as far as I am concerned are an immediate write-off I fear ..

chris_m

meunier wrote: »

Post Office products as far as I am concerned are an immediate write-off I fear ..

Hehe, I even buy my postage (what little I use) online

walshy66

Whats all this slagging off of the Post Office??

There's enough closed down already and with the attitudes towards them and their products on here, the rest will follow soon. I'll ask Andrew Cotterall and the rest of all you "experts" something now shall I? Find me a bank/building society account that will match RPI+1.5% over the next 5 years and will according to his calcs add over 50% to your initial capital?

Its got very little to do with keeping up with inflation or "real" loss as quoted you're all missing the point. Yes the bankers are taking us all for mugs but everything the P.O. does is government backed and despite where your political leanings are, their accounts are copper-bottomed. I suppose the tax free RPI+1% product offered via P.O and National Savings until July 2010 was dead wood too? Why was it withdrawn and has not been re-issued yet? Pretty simple really , it was costing the government money to have it open. OK this one isn't as good, mainly as its taxable, but it still looks reasonable enough to me.

Now forgive me, as I was educated in a comprehensive school in Accrington(hardly a financial hub!), but we did learn a lot of common sense there and be frugal with what we had. I don't hold A-levels or a Degree, I left school at 16 with 8 good grade proper O'Levels (not these easy to pass GCSE's cos you can resit to fudge a pass as many times as you want it seems) so I might be argueing with far more qualified people here, but please I lay down the challenge to find a 5 yr plan that offers 50%+ return, before you lambast the poor Post Office.

Andrew said "if you were able to index link your £100" when he was whinging about final interest not compound, well Andrew YOU CAN'T. So that is where his arguement falls over. This is a simple investment, its real and quoted with facts and figures. Its not some imaginary scenario of "what if's" and "maybe's"

I was interested to here someone quoting they did post on line and Andrew calculated with a spread sheet etc etc, but there in lies the problem. The virtual, computer driven world we all live in. People are loosing touch with reality and if their computer says its wrong or their sat nat puts them in a river instead of on a motorway, they are totally stuffed. Is a virtual postman going to deliver something you buy on line? No , somewhere reality, real people and tangable things still need to exist. Use your "noggin" (as our Maths teacher used to say) and trust your instinct instead of our "programmed" world for a change

opinions4u

walshy66 wrote: »

Whats all this slagging off of the Post Office??

They've launched a product that has deliberately misleading information in the headlines. That's the main issue here.

There's enough closed down already and with the attitudes towards them and their products on here, the rest will follow soon.

In that case they should provide better service and more transparency.

I'll ask Andrew Cotterall and the rest of all you "experts" something now shall I? Find me a bank/building society account that will match RPI+1.5% over the next 5 years

By failing to compound, they are quoting figures that mislead when compared. If they were honest and said RPI+1.1% AER (or whatever the real figure works out at) people would have more respect for the way they operate.

everything the P.O. does is government backed and despite where your political leanings are, their accounts are copper-bottomed.

I would strongly suggest you read up (Google?) on "Bank of Ireland Post Office FSCS". There is a clear difference between Bank of Ireland products sold via the Post Office and NS&I products sold via the Post Office. Your implication that they are safe as it gets is fairly shocking.

I suppose the tax free RPI+1% product offered via P.O and National Savings until July 2010 was dead wood too? Why was it withdrawn and has not been re-issued yet? Pretty simple really , it was costing the government money to have it open.

NS&I was taking too big a share of the saving market. Great product, but distorting the market significantly.

Is a virtual postman going to deliver something you buy on line?

iTunes manage to.

Jonbvn

walshy66 wrote: »

Whats all this slagging off of the Post Office??

....everything the P.O. does is government backed and despite where your political leanings are, their accounts are copper-bottomed.

This is completely WRONG!!! This account is being offered by the BOI. Please check before posting utter nonsense.

[Deleted User]

AndrewCotterill wrote: »

Beware - You should note that the Post office inflation linked bond giving RPI+1.5% each year is only inflation linked not inflation proofed. Do not use this product if you think inflation will rise to high single digits or go to double digit inflation over the next few years.

The critical lines they don't really want you to understand is "The annual returns are locked-in but they are not payable until the Bond matures at the end of the term and they do not compound annually".

The problem is that as they do not compound, above a certain rate of inflation the lack of compound interest becomes important. As you dont receive the interest till the end, it becomes critical if inflation rises too much.

Lets see what happens if RPI goes to exactly 10% over the next few years. In each of years 1 to 5 for each £100 you invest in the post office inflation linked product you would get £11.50 return (10% + 1.5%). So at the end of the 5 years you will receive your £100 + £57.5 interest = £157.5. (You cant access any of the interest till the end.)

However if you were able to fully index your £100 pounds just at RPI (here we are taking 10%), year one it would be need to be £110, year two £121, year three £133.1, year four £146.41 and at the end of year 5, just to receive back your £100 indexed to inflation you would need to get back £161.05.

So if you had your money in the Post office index linked account + 1.5%/yr, you would have lost money in real terms. The break even point is if RPI is at 8.3%. Above this you lose. Note - it only matters what inflation is doing in years 2-5.

Note if we had ravaging inflation in the last four years at exactly 46.9% you would have lost half your money in real terms because the lack of compound on the interest if so critical.

So beware, this does not inflation protect your money at 'high' levels of inflation. It is merely linked to inflation. Just the sort of misleading sales pitch I would expect from the financial sector.

Does this constitute some kind of misrepresentation? I was thinking of signing up for it until I decided to put the figures into a spread sheet to see what their small print meant in real terms. I wonder how many will not realise the risk?

Many thanks for plugging in the numbers. What do you think about the Yorkshire Building Society Index linked one?
I queried how they calculate of the amount received in the event of 'Early Termination'. They admitted that they did not know because Credit Suisse would do the calculation and have not told Yorkshire Building Society. They do not even know if there is a penalty if a sole holder dies?

B_Blank

Yes this bond is pretty bad to be honest. No access for 5 years is such a huge amount of time. And lets say inflation peaks this year and then falls back as IR rise. The fact your main interest payments will come from the first year (and then be stuck in an account earning no interest) is terrible.

alanq

Deleted_User wrote: »

What do you think about the Yorkshire Building Society Index linked one?

The YBS/Chelsea product is complicated but seems to address some of the criticisms made of the PO account. The main snag that I spotted was that YBS/FSCS will cover the initial investment amount but if Credit Suisse were to fail then (as far as I can see) no interest would be covered. This is presumably because any interest would only be due on maturity.

The YBS will pay 5 year's interest in one tax year which could push one into a higher tax band unless the account is held as an ISA.

The YBS bases its calculations only on the initial and final RPI values so one could lose out compared to BM/PO if inflation in some years was followed by deflation in others.