RPI Uncompounded Interest over 5 Years

Dw5

I've seen a couple of accounts giving interest based on RPI change over 5 years, but there seem to be unrealistic quotes of 20% or 30% change in that time. The ONS web site publishes an RPI CSV file, and if you look at the 5 year rolling change in RPI, this did rise to about 30% around 1991, but since then has been nearer to 12%.

Further, because the offered interest is not compounded, 12% uncompounded over 5 years is equivalent to nearer to 2.3% compounded pa.

Obviously, the current RPI is over 5%, and if this were to continue over 5 years, there would be 30% change. But what is the likelihood of this, and in effect a repeat of the late 80s interest rates?

Perhaps what is more likely is that the current 5% RPI will be well dampened when taken over 5 years, so these accounts seem to be being made misleadingly attractive.

Any comments? Are these accounts going to keep savings from losing effective value?

Loughton_Monkey

You need a crystal ball to predict inflation over the next 5 years. None of us can say any better than you.

Dw5 wrote: »

Are these accounts going to keep savings from losing effective value?

Obviously yes. That's provided that by 'effective value' you mean RPI. If you invest £10K at an investment rate equal to RPI, then be definition, it is keeping your original investment exactly to 'effective value'. Not a penny more. Not a penny less. What it doesn't do, though, is allow your 1st year's interest to be further re-invested at the same RPI rate.

I think the more relevant question (still unanswerable) is whether other savings rates could/might out-achieve an RPI rate.

opinions4u

Dw5 wrote: »

I've seen a couple of accounts giving interest based on RPI change over 5 years, but there seem to be unrealistic quotes of 20% or 30% change in that time. The ONS web site publishes an RPI CSV file, and if you look at the 5 year rolling change in RPI, this did rise to about 30% around 1991, but since then has been nearer to 12%.

As long as the basis of the figures given (e.g. it's based on RPI as at 31st March, or it's based on average RPI for the preceding xx months) is clear then it's reasonable.

Further, because the offered interest is not compounded, 12% uncompounded over 5 years is equivalent to nearer to 2.3% compounded pa.

The BM one, for example, pays interest away annually. This gives you the opportunity to reinvest the funds elsewhere and compound the return.

Obviously, the current RPI is over 5%, and if this were to continue over 5 years, there would be 30% change. But what is the likelihood of this, and in effect a repeat of the late 80s interest rates?

Bank of England have said inflation will fall. But high inflation may be seen as economically beneficial to HM Government as it potentially erodes the value of debt. So there could easily be an unwritten and unstated policy of "keep it high chaps".

Perhaps what is more likely is that the current 5% RPI will be well dampened when taken over 5 years, so these accounts seem to be being made misleadingly attractive.

They are what they are. An element of protection against inflation. Some pay an added rate. Some don't compound interest. All (except NS&I or ISA versions) are subject to income tax which means there's a chance that a taxpayer cannot keep up with inflation - although their non-earning / low-earning spouse could.

Any comments? Are these accounts going to keep savings from losing effective value?

Ignoring the tax and compounding issues, they will protect the value of savings. But it may be that over the next 5 years the new Halifax Reward Your Reward Super Duper Reward Bonus Savings Account (closed and re-opened annually to maintain that bonus) will earn a better return. Or a worse return. I don't know and neither does anybody else.

If you want to tie money up for 3 or 5 years, ensure that money buys you the same on maturity as it does today*, don't pay tax and don't think savings rates will exceed the index tracked ... then yes, they're a good idea.


* based on the index tracked. Of course, if you want to set £10k aside for school fees (or a car or whatever) in 2016 and the RPI is 25% higher but school fees are 40% higher then it will have failed to achieve your objective. If school fees are only 10% higher then it will have done better for you.