National Grid launches first ever inflation-linked retail bond

cmorgan091

Hi,

I was looking at this as a relatively minor investment (2.5k) in order to help balance out my portfolio (relatively new to investing). I am in my late twenties and looking at long term investments.

I already have a Vantage ISA account with Hargreaves Lansdown. I have spoken to them and they have pointed me to hl.co.uk/ngbond (can't make this a link as a fairly new user!) which describes this further.

For keeping it in the vantage ISA they have an AMC of 0.5% capped at £200 per year. (No charges if it is in an ordinary share account).

I presume that in the event that inflation remains positive overall then it will still work out cheaper to pay the AMC but take the tax benefit of it being in an ISA (I am a higher rate tax payer as well).

I just wondered if anyone had any advice on this? My view of only putting 2.5k in is that I only have 2.5k allowance left on my ISA for this tax year.

Any help would be much appreciated.

Cheers

Chris

sabretoothtigger

ses6jwg wrote: »

As Duncan Bannatyne would say..."I'm out"

:laugh: Wheres your pile of cash at

a minimum investment of £2,000

Seems they are aiming at retail investors. This is taxable and NSI arent so another big difference.
Within a SIPP I might, if they went below par value they might be an alternative to the shares

What is the symbol for them?

In August inflation rose to 5.2%, up from 5% in July

So the bond would pay 6.4% maybe?

Theres a few things which yield more then this like santander shares or others. Share prices rise with inflation especially the ones with foreign business so I think its similar

Ark_Welder

Assuming zero inflation (no comments, please!) then the AMC equates to higher-rate tax deducted from the 1.25% coupon:

£2500 x 0.5% AMC = £12.50

£2500 nominal amount x 1.25% = £31.25, upon which 40% tax is £12.50


With 5% Inflation:

£2500 + 5% = £2625 [Edit]See 'flaw with this in Post 27[Edit]

£2625 x 0.5% AMC = £13.125

Coupon: 1.25% with 5% inflation = 1.3125%

£2500 nominal amount x 1.3125% = £32.8125, upon which 40% tax is £13.125

Note that the interest is paid on the nominal capital amount and not the inflation-adjusted capital.


So the HL AMC equates to 40% of the yearly interest . So, as far as the interest is concerned there would be no difference for a higher-rate payer either inside or outside the HL ISA. However, the benefit of holding the bond inside the ISA will come when the bond is sold or redeemed: no additional tax will have to be paid, whereas outside an ISA the proceeds will be subject to income tax at your highest rate.

Ark_Welder

sabretoothtigger wrote: »

Within a SIPP I might, if they went below par value they might be an alternative to the shares

What is the symbol for them?


So the bond would pay 6.4% maybe?

Theres a few things which yield more then this like santander shares or others. Share prices rise with inflation especially the ones with foreign business so I think its similar

Do not confuse bonds with shares - they are very different (this bond in particular), especially the tax treatment. Whilst the dividends paid on NG shares are currently linked to inflation - in an arbitary manner - the link is subject to periodic review by the company, and its business is subject to regulatory review. The dividend could be reduced after the next review(s).

Not aware of an EPIC code yet - they are still in their launch period.

Neither share prices for any company nor the dividends paid thereon are guaranteed to rise with inflation.

The coupon payment is not 1.25% + RPI, it is 1.25% adjusted for RPI. So inflation at 5.2% would increase the coupon payment to 1.315% ( = 1.25 x 1.052).

cmorgan091

Ark Welder,

Thanks very much for your very informative posts, has helped me alot!

Cheers

Ark_Welder

Ark_Welder wrote: »

With 5% Inflation:

£2500 + 5% = £2625

£2625 x 0.5% AMC = £13.125

OK. Just spotted the flaw with the above, which is that it assumes that the price of the bond will rise each year at the rate of inflation. This is not necessarily the case because the price will be determined by demand, so the price could be higher or lower than the rate of inflation.

[Edit]
Note that the above is relevant in the intervening years until redemption. At redemption, the bond will be paid back at the par value adjusted for inflation. Before redemption the bond is traded on a stock exchange and so will be subject to supply and demand.

sabretoothtigger

Ultimately the bond pays face value so I would assume no appreciation. Is it really only 1.25% interest adjusted each year :laugh: why bother

So inflation of 5% every year for a decade would make the annual rate at about 2% per year in 2021 but with your money below inflation you'd lose alot?

Ark_Welder

sabretoothtigger wrote: »

Ultimately the bond pays face value so I would assume no appreciation. Is it really only 1.25% interest adjusted each year :laugh: why bother

So inflation of 5% every year for a decade would make the annual rate at about 2% per year in 2021 but with your money below inflation you'd lose alot?

The redemption price of the bond appreciates in line with RPI over the 10 years, so £100 would turn into £162.89 at a constant 5% increase in inflation.

The reason why someone might bother is to have a portion of their assets in inflation-linked investments. Why bother with inflation-adjusted 1.25%? Might as well ask why bother with a 0.5% AER over 5 years on ILSC's.

The main question, for me, is what my nominal rate of tax might be in 10 year's time.

cmorgan091

My understanding is that the original investment amount is returned with the advantage of the increases in RPI over the 10 years. The interest also increases in line with the RPI value.

My situation is that I am looking for something to provide a bit of balance to my (fairly new) portfolio, that keeps an amount of money above the rate of inflation.

Does anyone have any details of any other options that provide long term beating of inflation that are relatively safe and can be handled in a tax free manner (as I am higher rate and still will be in 10 years, although my wife is 20% rate payer so a possibility).

Please correct any misunderstanding I may have on this and any advice is greatly received for any investment ideas people have.

Just for reference I did utilise the NS&I Index Linked Certificates option when it was available.

I am still learning so go easy on me!

Cheers

Chris

Ark_Welder

cmorgan091 wrote: »

My understanding is that the original investment amount is returned with the advantage of the increases in RPI over the 10 years. The interest also increases in line with the RPI value.

Agreed. I have made an edit to Post 27 to try to clarify what I was meaning.

Occasionally, some banks and building societies have launched inflation-linked cash ISAs (and outside ISAs too), but there are none available at this moment - to my knowledge.

Another set of inflation-linked retail bonds are discussed on this thread. They differ from the NG offering in that the capital is not adjusted for inflation, the 'indexing' is all through the coupon. A downside is that the coupon is not adjusted by cumulative inflation but is done on a yearly basis. (And the issuer is RBS so there is the potential for this to go belly-up in the intervening period - less likely, but possible).

The other would be index-linked gilts, but these are expensive right now (unless you can buy into a new issue when one is launched) and so you might get back less than the rate of inflation between now and redemption. IL gilts can also return less than the original nominal amount if a period of deflation occurs. This is unlike NS&I ILSCs and the retail bonds above, which will all be paid back at par as a minimum.