Fixed rate bond or Index-linked Savings

TedH

Hi,

I need some advice on fixed rate bonds and Index-linked Savings, I'm unsure whether to take a 5-year fixed rate bond with my savings to play it safe and predictable or to put some of that into the 5-year NS&I Index-linked Savings Certificates that everyone is mentioning in the news today.

Currently the NS&I deal which allows a maximum of £15,000 to be saved at 0.5 percentage points above inflation works out at 5.8% which is set to rise further in the coming months but is there any rough estimate to what it is likely to drop to over the remaining years? I guess that's a silly question with the economy so unpredictable but is there perhaps an educated worse case guess on the rate of inflation that I can use to weigh out the risk?

I'm thinking that if the first year makes a particularly high percentage rate return and the remaining four years are even as much as 2% lower than it is today, it would still make a better return than the current fixed rate bonds but, it's just how low the drop is expected to be? If the inflation rate changes bring the rate of return below 3.5% in years 2-5 then it would make less than the current fixed rate deals over the 5 years so I'm really uncertain whether or not to do it.

many thanks.

Sceptic001

The fixed rate certificates (2.25% AER) are very uncompetitive compared to other available savings products, even allowing for their tax-free status.

The index-linked certificates are currently very attractive and if inflation rates plummet or savings rates rise you can cash them in after one year and still get tax-free index-linking. They look like a no-brainer to me.

xrjtg

TedH wrote: »

Currently the NS&I deal which allows a maximum of £15,000 to be saved at 0.5 percentage points above inflation works out at 5.8% which is set to rise further in the coming months but is there any rough estimate to what it is likely to drop to over the remaining years?

Keep in mind that the 5.8% figure is not the rate you can expect over the next 12 months, or even the instantaneous rate that you would be earning were you to deposit now, but the rate that you would have received had you invested in a similar product one year ago.

chucknorris

Does anyone know how to open/buy these inflation + 0.50% certificates? When I called the telephone number it always seems to be engaged. Can you get these at the Post oFiice?

Sceptic001

chucknorris wrote: »

Does anyone know how to open/buy these inflation + 0.50% certificates? When the call the telephone number it always seems to be engaged. Can you get these at the Post oFiice?

http://www.nsandi.com/savings-index-linked-savings-certificates

chucknorris

Sceptic001 wrote: »

http://www.nsandi.com/savings-index-linked-savings-certificates

Thanks I found that myself and came back to delete my post, but thanks anyway.

Unfortunately most of my cash is tied up in fixed rate savings bonds at the moment.

EDIT: Just noticed you can only invest 15k, very dissapointing.

Loughton_Monkey

TedH wrote: »

Currently the NS&I deal which allows a maximum of £15,000 to be saved at 0.5 percentage points above inflation works out at 5.8% which is set to rise further in the coming months but is there any rough estimate to what it is likely to drop to over the remaining years? .....

Don't know where you get the 5.8% from. They will rise in line with RPI, which none of us can predict. There will almost certainly be a 2%-ish 'step change' downwards in RPI from January when the VAT rise drops off.

chucknorris

Loughton_Monkey wrote: »

Don't know where you get the 5.8% from. They will rise in line with RPI, which none of us can predict. There will almost certainly be a 2%-ish 'step change' downwards in RPI from January when the VAT rise drops off.

It still looks a good deal for that first 13 months though especially if you are caught in that 60% marginal tax band of earnings 100k - 112.95k which is looking likely for me. If it is worth about 4% overall in that period that's equivalent to 10% gross (worth 6.67% in the 40% tax band). The big disappointment is that you are limited to 15k which is a bit of a joke really.

wriggly

chucknorris wrote: »

It still looks a good deal for that first 13 months though especially if you are caught in that 60% marginal tax band of earnings 100k - 112.95k which is looking likely for me.

The 5.8% that is being mentioned is irrelevant - it is what you would have got if you had been invested for the previous 12 months. If you buy now, you will get a different interest rate over the next 12-13 months, the only guarantees being that it will be at least 0.25% and that it will be higher than inflation.

Despite that, since it is tax-free, it is likely to be a good choice for someone facing a very high marginal tax rate. And this is one of the reasons it is limited to £15k.

chucknorris

wriggly wrote: »

The 5.8% that is being mentioned is irrelevant - it is what you would have got if you had been invested for the previous 12 months. If you buy now, you will get a different interest rate over the next 12-13 months, the only guarantees being that it will be at least 0.25% and that it will be higher than inflation.

Despite that, since it is tax-free, it is likely to be a good choice for someone facing a very high marginal tax rate. And this is one of the reasons it is limited to £15k.

I know it is irrelevant, what I do not know is why you are telling me, is it not obvious from my post that I understand what they are?

pqrdef

Deflation might happen if the economy goes belly-up again, but stagflation might seem more likely. The government doesn't want to reduce inflation. It just doesn't want to say so.

But the beauty of it is, the NS&I certificates don't lock you in. You can cash in at any time after the first year and you get RPI up to date, and a bit over.