Martin's wrong!

webwiz

Martins says: NS&I (the govt. savings organisation) allows you to put £100 to £15,000 in index linked savings which pay interest of 1.1% above the rate of inflation (RPI). Previously I wasn't a fan, yet as inflation's now a huge 4.4%, that's changed. As it's tax-free this is equivalent to 9.25% for higher rate taxpayers and 6.9% at the basic rate; much higher than normal savings accounts.

Along with many other commentators Martin has made a mistake about NSI indexed link bomds. It is true that these pay inflation plus, and it is true that inflation is currently 4.4%. But they will NOT pay 4.4%+1.1% (unless by a fluke)

The reason for this is that the current rate of inflation is the percentage increase of the RPI over the PAST 12 months. It is a historical figure. NSI will pay out the percentage rise in the RPI over the FUTURE years. Nobody knows what the figure will be.

If you think inflation will continue or increase these will prove a good investment IF YOU ARE RIGHT. Like share prices past performance is not a guarantee of future performance.

nrsql

>> Nobody knows what the figure will be.
Just like no one knows what a savings account interest rate will be.
Might be 5% at the moment but that is the current rate - no guarantee it will be that tomorrow (actually no guarantee it is actually that today if it is changed retrospectively).

IGK

It's correct to say that an Index-Linked NSC doesn't currently pay 4.4% + 1.1%, as 4.4% is the historic inflation rate, i.e. what it has been up till now.
Given they are a fixed-term investment (currently either 3 or 5 years), then the best way to think of the return is 1.1% + the average inflation rate over that term.
The 3 year certificate actually pays RPI +1.15%, the 5 year RPI + 1.1%.
I'm a big fan of these, mainly because they're 100% safe, they're tax-free, and they are by their very nature, inflation-proof.
They're not going to make you rich overnight, but you can certainly sleep at night.
With the option to re-invest at maturity, and the opportunity to buy new issues as they become available, it's possible to build quite a decent sized portfolio of these.

djblamire

Does anyone have any information on what the RPI has been over the last few years ??

Thanks
Daniel

StevieJ

http://www.incomesdata.co.uk/statistics/statrpi.htm

The data is top right,

These certificates can be cashed in after one year (not 3 or 5 ) and you still receive inflation beating tax free return e.g. RPI + 0.9. All the financial commentators keep mentioning that you need to take a gamble on inflation and tie up your cash for the next 3 to 5 years this is not true.

djblamire

StevieJ wrote:

http://www.incomesdata.co.uk/statistics/statrpi.htm

The data is top right,

These certificates can be cashed in after one year (not 3 or 5 ) and you still receive inflation beating tax free return e.g. RPI + 0.9. All the financial commentators keep mentioning that you need to take a gamble on inflation and tie up your cash for the next 3 to 5 years this is not true.

Thanks for that.

So there is no penalty to cashin early ?

Thanks
Daniel

IGK

djblamire wrote:

Thanks for that.

So there is no penalty to cashin early ?

Thanks
Daniel

You need to keep them at least a year to earn any interest or indexing. From
http://www.nsandi.com/products/ilsc/howitworks.jsp

Savings Certificates cashed in within the first year of investing don’t earn any index-linking or extra interest, so it’s best to keep them for at least a year. If you cash in Certificates any time after the first year, you will earn index-linking and extra interest for each complete month you’ve held them.

Also, because the interest isn't added evenly, you get less interest on top of the indexing if you don't keep them for the full term.
Take the 3 year issue, paying 1.15%.
After 1 year the 1st anniversary value is indexing +0.9% instead of 1.15%. For the maximum investment of £15,000 that would be a 'penalty' of about £38 to cash in early. Not huge, but worth bearing in mind.

StevieJ

The point I was trying to make was that these certificates not only provide a potentially top rate of interest ( especially for HR taxpayers) but also possess a great deal of flexibility should the fundamentals change.

codetown

if these are really tax-free and emitted multiple times a year (as they say on their web site) they look extremly attractive. Where can I find a deeper description of them? Has Martin dedicated an article I missed?

And if this instrument is out there for everyone, why don't other banks use it as well, as they use ISAs for example?

StevieJ

Here is Martins latest thread.

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1098730527,15721,#guarantee

I have sent him a private message asking him to check the flexibility of these,
he states on the above link that they need to be kept for three years, having read the terms and conditions I don't think this is correct.

tommycatz

Key points from http://www.nsandi.com/products/ilsc/applynow.jsp?invest-now-button=Invest+now%A0%A0%3E%3E T&C's

Index linked certificates can

11. In the event of a decrease in the Retail Prices Index:

(a) any maturity value will never be less than the preceding anniversary value, or, in the case of a Certificate with a term of one year, the purchase price, together with interest at the relevant rate for the period from the preceding anniversary date to the maturity date;

(b) any anniversary value will never be less than the preceding anniversary value or, in the case of the first anniversary, the purchase price, together with interest at the relevant rate for the year.



16. An index-linked value will be calculated as V x B/A where:

(a) 'V' is the value of the Certificate at the beginning of the index-linked period (this will be the purchase price or the value at an anniversary date);

(b) 'A' is the Index figure applicable to the calendar month in which the first day of the index-linked period falls (this day will be the purchase date or an anniversary of it); and

(c) ‘B’ is the index figure applicable to the calendar month in which the day after the final day of the index-linked period falls. This will be the maturity date, an anniversary date, or the day after the last completed month for which index-linking is earned.

Therefore, if you buy now, RPI has to remain at 4.4% or increase.
If is deceases then the rate is very poor.
I emailed NS and they confirmed this is the case!

Cheers