Returns of 1.3 x RPI, and other choices

Reaper

Though these have been mentioned before it tends to have only been in passing or not aimed at novice investors, so I thought I would try to explain them as simply as possible.

These are bonds issued by the Royal Bank of Scotland.

Option 1) RPI x 1.3
Name: Royal Bank of Scotland PP Floored Fltg Rte Nts 06/12/20
Code when buying: RBPX
It runs until 6 Dec 2020
A good option if you think inflation will stay high.

Option 2) RPI or 3.9%, whichever is the higher.
Name: Royal Bank of Scotland PP Inf Lkd Nts 01/11/22
Code when buying: RBPI
It runs until 1 Nov 2022
A good option if you are not sure whether we are headed for inflation or deflation in the future and want to hedge your bets. Particularly attractive if RPI drops or goes negative.

There is another option linked to the LIBOR rate (RBLI) which is not very attractive now but could become so if the ecomony ever returns to "normal". However I don't plan to cover it here.

If you are a taxpayer then buy them inside a Stocks & Shares ISA or SIPP to make sure the income is tax free. This post suggests some ISA brokers you could use:
http://forums.moneysavingexpert.com/showpost.php?p=42576120&postcount=3

Pros:
* They can be bought in addition to NS&I Index Linked bonds. There is no limit on how many you can buy though if you are putting them inside a S&S ISA the normal annual ISA limits apply.
* Potentially better returns than NS&I, though it depends what interest rates do.
* Payments are quarterly (in savings terms that would give a boost the AER%)
* You might be able to purchase them at below cost. So for example you can currently buy £100 of RBPI for £98.69. That means effectively you get a small improvement on the interest rate on offer and a small increase in the capital you get back if you hold them to redemption.
* Unlike shares there is no stamp duty to pay.

Cons:
* Unlike index linked certificates where the initial investment is 100% safe you would lose your investment if the Royal Bank of Scotland went into administration, with no recourse to the FSCS. Being 84% owned by the government that is unlikely, though not impossible. The bank does hold a lot of Irish debt.
* Charges: Similar to shares the buy and sell prices are different, known as the spread. It changes day by day but typically will be 1-2%.
* Charges: Your stockbroker will charge a fee for buying and selling (e.g. X-O charges £5.95)
* Unlike a savings account the payments do not automatically compound in the account (unless you choose to use the income to purchase more units of course.)
* Unlike NS&I the RBPX version has no minimum, so payments will stop if we have any periods of deflation.

Other things to note:
* They will pay out the capital on the redemption date (£100 each). You can also sell them before that but you will get the prevailing market rate, which may be more or less than you paid for it.
* As mentioned above the purchase price will not necessarily be £100 each. Currently they are available at or below that price. The purchase price will fluctuate with populatity, as will the selling price if sold early.


Some of the previous threads:
https://forums.moneysavingexpert.com/discussion/comment/38115966#Comment_38115966
https://forums.moneysavingexpert.com/discussion/2866844

Let me know if anything is unclear or I made any mistakes.

JamesU

Nice post:). Links to RBS factsheets here:

RBPI
http://ukmarkets.rbs.com/EN/MediaLibrary/Document/PDF/Factsheet/Products/Bonds/Inf_Linked_RoyalBond_web.pdf

RBPX
http://ukmarkets.rbs.com/MediaLibrary/Document/PDF/ProductDocuments/GB00B4MTS317/GB00B4MTS317_EN_Factsheet.pdf

JamesU

Reaper

JamesU, I've made the changes as suggested, though kept the title as short as possible. Of course if I was a journalist I would take the current wildly misleading MSE "Will NS&I pay 9%?" headline (see the box on the right) and multiply it up for a stupendous sounding title. Fortunately I'm no journalist.

purch

It is also worth noting that unlike Index Linked Gilts, these securities only Inflation Link the coupon and not the capital.

Reaper

purch wrote: »

It is also worth noting that unlike Index Linked Gilts, these securities only Inflation Link the coupon and not the capital.

True, though on the flip side if we were to have a period of deflation the value of the capital returned from Gilts would decrease.

I think most people will be comparing these to NS&I Index Linked Bonds which don't index link the capital.

I think it would be good if Martin were to do an article on all the index linked options, but I know he tends to shy away from investments.

JamesU

Forgot to mention, part info only available on the factsheets regarding variation in quarterly qualifying payment dates vs corresponding %RPI valuation months:

RBPI: 1st Feb, May, Aug, Nov (%RPI in Dec, Mar, Jun, Sep)

RBPX: 6th Mar, Jun, Sep, Dec (%RPI in Jan, Apr, Jul, Oct)

JamesU

JamesU

Quick diarised check on RBS bonds. Today's prices and spreads: RBPI: 88.5/90.5; RBPX: 89.3/91.3

For RBPX (due quarterly if held 6th Sept 11):
RPI Jul 11/Jul 10 = 234.7/223.6 = (4.9%x1.3)/4 = 1.6%
Current loss on spread (excluding dealing costs) = 2.2%

Think maths and timing is correct. If so cheap entry point at 91.3p despite large spread. But even so, for inflation-linked options, difficult to justify purchase of RBPX based on counterpary risk at RBS relative to availability of ILCs at present.

JamesU

Reaper

I've been keeping an eye on the RBPX and think that's a pretty good price. I might be tempted but at the moment there are lots of other things competing for my S&S ISA money.

JamesU

RBPI: 87/91 and RBPX: 83.6/87.6

Anybody any thoughts on what happens to the bonds if RBS is nationalised?

JamesU

Reaper

It's 84% government owned already. However if it went 100% I think you should be prepared to lose the money. I can see the government expecting bond holders who bought after the original credit crunch crisis to accept risk and pay out as well as the tax payers.

Just my opinion, but that's why although I like these I am only using them for a small part of my savings.

Ark_Welder

Reaper wrote: »

Just my opinion, but that's why although I like these I am only using them for a small part of my savings.

Ditto.
....