Cash in ns&i index linked bonds?

ed123_2

.....looking at the fairly high increases in the rp index in the early months of last year (together with what was mentioned above re selling before the end of February to get the increase as at Dec 2011) then if people were thinking of selling now would be the time to do it (as your first anniversary date is May then I think you will see an reduction even from today's return so I would hold on to the certs and see it as a long term saving vehicle) ...( personally I am looking long term and keeping my index linked certs as I remember 25% inflation in the seventies when the best gross rate was around 9% !).......ed

oldvicar

As a couple of others have mentioned, because the RPI index for Jan went down, back to the level last seen in October 2011, then NOW (before the end of February 2012) is a very good time to sell Certificates you have held for over 12 months, but only if you were thinking of sellng soon anyway. You'll get slightly more selling now than you would selling in March, and quite possibly the following couple of months too.

If, like me, you bought these as a long term hedge against inflation, then you'll hang on to them and ignore temporary ups and downs.

bongoali

Sceptic001 wrote: »

Example: £100 of Certificates bought in January 2011 (RPI 226.8)
Cashed in February 2012 yield
239.4/226.8 * 100 = £105.55 (plus fixed element)
Cashed in March 2012 yield
238/226.8 * 100 = £104.94 (plus fixed element)

Hi Sceptic.. I don't understand this example.

If certs. were purchased in Jan 2011 are you saying the starting index is November 2010 (226.8) ?

If it is 226.8, I thought

cashing in Feb would be
238.5(Nov 2011)/226.8 (Nov 2010) * 100 = value on anniversary + fixed interest PLUS

(a) any positive index-linking for each complete month from that anniversary date to the date of repayment; and

• (b) 1/12th of the annual interest for each complete month held from that anniversary date."

I guess a) and b) would be Jan2011-Feb2011

and cashing in Mar would be the same as above except for a) and b) above you receive Jan2011-Mar2011

Johnny_Doe

ed123 wrote: »

.....looking at the fairly high increases in the rp index in the early months of last year (together with what was mentioned above re selling before the end of February to get the increase as at Dec 2011) then if people were thinking of selling now would be the time to do it (as your first anniversary date is May then I think you will see an reduction even from today's return so I would hold on to the certs and see it as a long term saving vehicle) ...( personally I am looking long term and keeping my index linked certs as I remember 25% inflation in the seventies when the best gross rate was around 9% !).......ed

Interesting point about the 1970's Ed (apologies for my charts not going back that far), do you think Inflation will really hit 25% again? Govt target is 2% there would be massive civil unrest, I guess anything is possible?

Sceptic001

bongoali wrote: »

Hi Sceptic.. I don't understand this example.

If certs. were purchased in Jan 2011 are you saying the starting index is November 2010 (226.8) ?

If it is 226.8, I thought

cashing in Feb would be
238.5(Nov 2011)/226.8 (Nov 2010) * 100 = value on anniversary + fixed interest PLUS

(a) any positive index-linking for each complete month from that anniversary date to the date of repayment; and

• (b) 1/12th of the annual interest for each complete month held from that anniversary date."

I guess a) and b) would be Jan2011-Feb2011

and cashing in Mar would be the same as above except for a) and b) above you receive Jan2011-Mar2011

Well spotted, bongoali. The fact that index-linking and interest are consolidated annually mean that the benefit of cashing in February is significantly reduced for certificates that have just had an anniversary:

Adopting an approach to accommodate this, for certificates with a consolidated value (ie. including previous index-linking and interest) of £100 with a January anniversary, the difference between cashing in February and March is:

Feb: 239.4/238.5 * 100 = £100.37 plus the fixed element
Mar: 238.0 is less than 238.5 so no index-linking, only the fixed element

so the benefit is smaller (0.37%) than my original example suggested (but still not to be sniffed at in my opinion:)).

But for certificates with a consolidated value of £100 with an April anniversary, the difference between cashing in February and March is:

Feb: 239.4/231.3 * 100 = £103.50 plus the fixed element
Mar: 238.0/231.3 * 100 = £102.90 plus the fixed element

So in this example you get an extra 0.6% by cashing in February rather than waiting until March. A no-brainer if you are intending to cash in anyway.:j

Sceptic001

I agree with oldvicar and ed123. Despite my exhaustive efforts to calculate the benefit of cashing in in February, I view my ILSCs as a long-term hold. Tax-free, backed by HM Treasury and guaranteed to outperform the RPI still looks like a good deal to me.

alanq

Depending on the sums available to save in ILSC, they may be worth keeping even during times of deflation / low inflation. Although nothing is guaranteed for the future, in recent years one has been able to reinvest without limit maturing ILSCs into a current issue. In this way a large fund can be protected when high inflation returns. I cashed in, or chose not to reinvest, some of my ILSC the last time inflation was low (or negative), reasoning that when times changed I could reinvest the funds. I was caught out because for the last couple of years there has only been one issue per year and even those only available for a few months. Thus I missed out on getting 5%+ tax free on some of my funds and more than lost what I gained by saving elsewhere when inflation was low.

bongoali

Hi Sceptic - thanks.
Just couple of further questions if I may

1) If cashing in in March, the fixed element will be higher (i.e. not the same) as if cashing in in Feb - so this may change things?

2) If cashing in in Feb 2012, for the partial months, is it true that you use Dec 2011 as the index (same question for Mar 2012 as I see you're using a Jan 2012 index)

Sorry to the original poster if this is going off kilt.

Thanks

Sceptic001

bongoali wrote: »

Hi Sceptic - thanks.
Just couple of further questions if I may

1) If cashing in in March, the fixed element will be higher (i.e. not the same) as if cashing in in Feb - so this may change things?

NS&I calculate the fixed element on complete months since purchase, so it depends what day of the month you originally purchased the certificate. If you encash on or after the day-anniversary (moniversary???) of purchase it makes no difference. If you encash before you do indeed not get that month's addition. So you "lose" very marginally by 1/12th of whatever % you are receiving. And on the other hand, you have the use of the money for the extra few days if you cash in February.

bongoali wrote: »

2) If cashing in in Feb 2012, for the partial months, is it true that you use Dec 2011 as the index (same question for Mar 2012 as I see you're using a Jan 2012 index)

The closing RPI NS&I use is always the RPI for two months prior to the date of encashment. So encash on 29th February and they use the December figure. Encash on 1st March and they use the January figure. This is for the simple reason that the February figure is not available until mid March, so they would not be able to calculate repayment values in the first half of the month.

From NS&I T&Cs:

Meaning of complete month

4. For the purposes of these terms and conditions, a month is completed at the end of the day immediately before the same date as the date of purchase of a Certificate, but in a month following the month of purchase (for example, for a Certificate purchased on 5 January, the first month is completed at the end of 4 February).

5. Where the date of purchase was 29, 30 or 31 of a month, and a later calendar month does not contain such a date, the relevant month is completed at the end of the day preceding the last day of that calendar month (for example, for a Certificate purchased on 31 March, the first month is completed at the end of 29 April).

6. In the case of a Certificate with a purchase date of 29 February, every 12th month will be completed at the end of 27 February, even where that month falls in a leap year.

Who would have thought the definition of a month could be so complicated?

bongoali

Sceptic001 wrote: »

And on the other hand, you have the use of the money for the extra few days if you cash in February.

Good point.

Also thanks for highlighing the fact that at time on encash it's worth waiting until mid-month to get the option of using two indicies (if you are in a position where you hold on a couple of weeks to encash in 1st next month) - I hadn't noticed that

All the best