NS&I How much will "tax free" save? Confused

Wul

I'm new here so go easy.
I'm planning to invest in the latest NS&I 5 year tax free, RPI+0.5% savings certificates.
However on Martin's savings best buys there are similar products that offer RPI (Retail Price Index) + 1.5%, or even 2%. These are not tax free like the NS&I and Martin notes that "It only beats inflation if you dont pay tax".

That's what I don't understand; surely 2% is four times as much as 0.5%, leaving plenty of margin to pay off the tax and still get a better return.
If I were to pay tax on the interest from 2%, I'd be paying 20% (or one fifth) of the 2% return, which makes the tax man's share 0.4% of the effective rate I'm getting, leaving me with 1.6% to myself, or more than 3 times what NS&I are offering.

So how come getting a rate of 0.5% tax free is so much better than paying tax on 2%?
I'm sure I must be missing something here, please enlighten me.

pressuredrop_2

You have inflation at 0%. Do the maths with the current inflation rate of 5.2%. Or a higher tax-rate.

Lokolo_2

Hi Wul and Welcome :j

My understanding is that on the non-NS&I index linked bonds, you'd have to pay tax on the full percentage, IE if you had inflation at 5% and 1.5% bonus, that 6.5% actually is effectively around 5% after tax...hence why in the NS&I bond, you'd still get the 5% (as an example) plus 0.5%, a total of 5.5% tax-free, so overall NS&I bonds pay better!

If I'm wrong feel free to correct me anyone, the above is just my understanding of it!

pqrdef

That 1.5% isn't per year. It's just a once-only 1.5% bonus at the end of 5 years, so roughly equivalent to 0.3% a year.

opinions4u

pqrdef wrote: »

That 1.5% isn't per year. It's just a once-only 1.5% bonus at the end of 5 years, so roughly equivalent to 0.3% a year.

The BM version pays an additional 1.5% each year.

If inflation drops, as forecast, that should mean a better return that NS&I.

So the OP makes a fair point, but NS&I have the guarantees.

Of course, if you think inflation will fall and interest rates will rise, the access to NS&I could be useful.

Biggles

opinions4u wrote: »

The BM version pays an additional 1.5% each year.

But that's only if you are prepared to be locked in for 5 years. Their 3-year one only pays 0.75%.

With NS&I you can get at your cash at any time if you so need.