MSE News: NS&I inflation-beating savings to return

saveonarola

What do people think about taking money from a Cash ISA to put into these NS&I Index-Linked Savings Certificates?

I have £35,000 in a Cash ISA, saved over many years, which is currently getting 3.1%, and I'm thinking of moving £15,000 of this into the NS&I certs. I know that no one can say what inflation is going to do, but the only downside I can see is that if inflation drops significantly and in a year's time I want to move the money out of the NS&I certs, it wouldn't be possible to keep all the tax protection. Also, you can never 'replace' lost years' ISA allowances, but I'm not too worried about this because I don't earn much so I can't always use my allowance.

All of the ISA money is from previous years, so I wouldn't be losing any interest by taking it out. Is there anything I'm missing? Is it even worth it? (I have read this whole thread, and the information on the NS&I website, but I must admit that I still don't quite understand how the index works, and I bet I'm not the only one. For example, if inflation is, say, 4% every month from two months before you buy the certificates to two months before you cash them in, what would be the change in the index over that period? 4%?)

grizzly1911

bugbyte wrote: »

Mikey 17
This is important to me, as I have just brought a £500 cert, whilst the bulk of our savings are transferred from elsewhere. This will take up to a week, and I am hoping the issue is still going by then.

Eggs and baskets spring to mind.

The lovely NS&I are not doing this for our benefit.

Inflation was partly caused by the effects of devaluation of the currency flowing through (as we import so much and commodities are not linked to sterling. If the powers that be are happy at the current devalued level then inflation will begin to tail off.:(

Masomnia

Mikey17 wrote: »

Can i ask please, are these certificates a good idea for a non tax payer
My wife does not work , so pays no tax on her savings. Thank you very much

It's hard to say because you don't know what the rate will be and how that will compare to standard savings accounts.

What I would say is that they're not going to be a 'bad deal' as such, because you know you'll keep up with inflation and then get a bit on top.

They're a better deal for tax payers because they'll get a better return because of the lack of taxation, but that doesn't mean they're a bad idea if you're a non-tax payer. They just do what it says on the tin, so to speak.

Masomnia

bugbyte wrote: »

For comparison terms, I believe you would have to find a savings account that was accessible that pays 5.8% non tax payer, 7.25% basic, 9.67 higher. Good luck if you can find that!

True enough, but remember that those figures are backward looking and won't affect money you put in now.

Comparing now to one year's time the effects of the VAT increase won't be in, so you can take the best part of 2% off the figure, all other things being equal. If interest rates don't rise then that'll keep RPI low. If the currency appreciates from its low point now then imported goods should be cheaper. Oil's just tanked from a high point, if that doesn't go higher again in the next year then that won't impact on inflation etc etc.

As I've said they do what they say on the tin. We've just had some pretty freakish events with the Arab uprisings and the VAT increase, so don't expect high inflation like we've just seen in the next year. Of course there may be, it's all just speculation... but that's the point of the certificates, to eliminate that risk.

Otherwise they wouldn't be introducing them now

Masomnia

saveonarola wrote: »

I have read this whole thread, and the information on the NS&I website, but I must admit that I still don't quite understand how the index works, and I bet I'm not the only one. For example, if inflation is, say, 4% every month from two months before you buy the certificates to two months before you cash them in, what would be the change in the index over that period? 4%?)

It is confusing!

The figures they quote on the news are the year-on-year figures. So when they say RPI increased by 5.3% that's comparing the price level between this March just gone and the March before. So in a sense the different monthly figures will be irrelevant to you because they're for those specific periods, nothing to do with your savings. Except for providing a general idea of what inflation is doing. But, as I mentioned in the previous thread, comparing this year with last year (as the current announcements do) is pointless when looking at these because the various factors influence inflation will be completely different when you compare this year to next year.

This is why they produce the index and don't just work out percentages, so you can compare different price levels between different months.

Hope that kind of helps.

Rollinghome

Masomnia wrote: »

True enough, but remember that those figures are backward looking and won't affect money you put in now.

Listen to Mr Masomnia. The figures suggested on This Is Money etc are nonsense and highly misleading.

No one knows what the return on these will be. It will depend on the rate of inflation not now but in 12 months time and in the following years, which nobody knows. That will depend on things like the level of the £, the level of the $, and whether Mr Oborne decides to increase VAT again, which seems a little unlikely. And if you do know all those things then you should be trading commodities and currencies.

bugbyte_2

Rollinghome wrote: »

No one knows what the return on these will be.

Agreed.... up to a point. We do know the return will be RPI + the yearly %, and we also know that if a better product materialises elsewhere we can bail out, and as long as it is after the first year, we still get RPI, so we cannot actually loose.

You can only compare products that are available now. In the future there may be better products, but take into account there has not been to my knowledge a single account that would pay me RPI after tax available this past year.

We cannot compare what might be available in the future, and if something better does come along, you can bail.

The ISA issue is an interesting one, but even then, you cannot loose, you just may not gain as much if ISA's suddenly become competative again.

Having said all of this, I reckon Masomnia makes some compelling points why RPI will be lower next year.

Rollinghome

bugbyte wrote: »

Agreed.... up to a point. We do know the return will be RPI + the yearly %, and we also know that if a better product materialises elsewhere we can bail out, and as long as it is after the first year, we still get RPI, so we cannot actually loose.

Well we know that in 'real terms' the return will be 0.25% for year 1.

Whether we can 'lose' or not depends on what you had in mind. Just over a year ago, when it was obvious VAT and other factors would push up the RPI, I put the max in the 46th and 19th issues (3 and 5 years) then the same again in the 47th and 20th issues as soon as they came out.

So did I win or lose? I'll get the full 5.3% plus 1% (or rather a fraction less) this year which I'm more than pleased with compared to general savings rates. But if I was being picky I could say I'd have got a lot more if I'd put more money in some of my other investments which did a lot better. Every investment decision comes with an 'opportunity risk'.

If someone decides to stay in cash, alternatives could be a 1 yr fixed rate account of 3.5% or a 5 yr fix at 5.05%. For the IL certs to beat the 3.5% fix a basic rate payer needs inflation over next year of around 2.6% or just 1.9% for a HR payer. Of course there could also be better fixed rate accounts in the next few weeks - or not.

On that basis the IL certs look a very reasonable choice for someone happy to lock into cash for at least a year. It's looks unlikely that inflation will be substantially below those levels for a while. But anyone expecting 7.25% or 9.67%, while possible, could be very disappointed. We can only guess and any assumptions could come back to bite us. Better to be pleasantly surprised.

A more balanced assessment than the TIM stuff can be found at http://citywire.co.uk/money/hooray-inflation-linked-bonds-are-back/a491640 by good old Lorna Bourke.

adindas

I am quite confusing. How do we get the RPI figure was 232.5 and April 2010 RPI figure was 220.7 and then become 5.3%. I am sorry for my ignorance.

snooping_around wrote: »

Ok fully understood now thanks nrsql, Stochasticity and Reaper

I just looked at the RPI figures on the ONS site; the April 2011 RPI figure was 232.5 and April 2010 RPI figure was 220.7. So had I invested in an NS&I certificate in Jun2010, I would have gotten 5.3% + 0.5% interest! and tax free! Nearly treble what im getting at the bank!

snooping_around

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