Inflation Linked Savings discussion area

Former_MSE_Alana

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Inflation linked savings article

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chillin_out

See (tinypic.com/r/femlgw/7, you will need to cut and paste the link into your browser) for a graph of the RPI v base rate for the past few years (forum rules won't let me post the picture or a proper link in this message)


RPI v Base rate for the past 5 years. The index linking sounds good at the moment, but you can see how quickly things can change. I think every commentator expects a base rate rise soon.
...Something to think about when deciding whether to buy an RPI linked investment

Cuidadosa

Hi All,

I currently have all my savings locked away in ISAs. I've got Santander's current year ISA and a Natwest paying around 3% with all my previous years ISAs (18000).
Since I'm saving for a house deposit, I don't envisage needing it for the next year.

Is it worth to transfer from the Natwest account into the NS&I inflation tracking one?

chardir

Cuidadosa wrote: »

Hi All,

I currently have all my savings locked away in ISAs. I've got Santander's current year ISA and a Natwest paying around 3% with all my previous years ISAs (18000).
Since I'm saving for a house deposit, I don't envisage needing it for the next year.

Is it worth to transfer from the Natwest account into the NS&I inflation tracking one?

No. By moving it from the ISA you will lose the tax benefits. The NS&I account is tax free but by moving it out of the ISA you lose that ISA allowance forever. You wouldn't be able to move the money from the NS&I account back to an ISA, except by using your yearly £5000ish allowance.

Cuidadosa

But are those tax benefits worth the difference in interest I get?

chillin_out

Cuidadosa wrote: »

Hi All,

I currently have all my savings locked away in ISAs. I've got Santander's current year ISA and a Natwest paying around 3% with all my previous years ISAs (18000).
Since I'm saving for a house deposit, I don't envisage needing it for the next year.

Is it worth to transfer from the Natwest account into the NS&I inflation tracking one?

This is something only you can decide - you are currently getting a guaranteed 3% (which may rise when base rates rise if it is linked to the base rate rather than fixed)
if you move to the index linked investment you will get more interest at the moment (5.7%), but there is no way of knowing whether this will remain at this level. worst case you get 0.5%, best case you probably are looking at 6% (but this is a real guess).
Most commentators believe interest rates will rise in the next few months, which should mean RPI will fall (as will house prices). Over the past 5 years it is more usual for interest rates to be higher than RPI.
Personnally I would stick with the ISA as you know what you will get

Cuidadosa

I'm not sure if the Natwest e-ISA will raise with interest rates.... Does anyone know?

this is the description of the account (I've got it since 2009 so rates are different from the ones currently offered)

stphnstevey

Do I understand this correctly - 'It pays the yearly change in RPI plus 0.5% AER'

So it's not: RPI x amount invested ????

It's: change in RPI x amount invested

these are two very different amounts!!!!!!!

xrjtg

stphnstevey wrote: »

Do I understand this correctly - 'It pays the yearly change in RPI plus 0.5% AER'

So it's not: RPI x amount invested ????

It's: change in RPI x amount invested

these are two very different amounts!!!!!!!

The RPI is an index, notionally proportional to the "cost of living". The percentage rates used in news stories are changes in the index: if the index was 100 in January 2010 and 105 in January 2011 then the January 2011 RPI inflation figure would be 5%.

RPI * amount invested is indeed a silly idea, providing you interpret RPI correctly. Equally, percentage change in percentage change of RPI * amount invested is a silly idea, but one that only occurs if the meaning of RPI has been misunderstood.

You're quite right that understanding the distinction is important for anyone considering taking out one of these products.

stphnstevey

Martin quotes previous returns as around 9% - which I think can be missunderstood that previous returns have an effect on future returns

Here no one knows what is going to happen so your taking a chance that you only get the 0.5% fixed return after 5yrs (or 0.25% over 1yr)

I don't think this is clear in his article

Sceptic001

stphnstevey wrote: »

Do I understand this correctly - 'It pays the yearly change in RPI plus 0.5% AER'

So it's not: RPI x amount invested ????

It's: change in RPI x amount invested

these are two very different amounts!!!!!!!

RPI stands for Retail Prices Index. It is a figure (currently 234.4), not a percentage. It is not the same as the inflation rate.

The percentage is calculated by comparing with last year's figure (222.8), giving a current inflation rate of 5.2%. The "yearly change in the RPI" is the same thing as the popularly quoted "annual inflation rate". So money invested in index-linked certificates has grown by 5.2% (plus the fixed element) over the last year.