Renew my 5yr Index Linked NS&I??

6022tivo

Hello

I have just received my letter that states my 5yr Index linked certificate is due to end at the end of the month. The estimate is £18,642 which is not too bad considering. (I think??)

So now I have a couple of options?
Cash it out?
Leave it in under new terms.
These are.. 5 years at index linked + 0.25% EAR? But with more penalties..
90 loss of interest + No interest in that year it is withdrawn?

Normally I would not have any potential use for this money, so would let it carry on, however, I may have to call upon it, so will probably cash it in (Unless this is a really good deal, or potentially a good deal due to the index linked element?

Any "advice"? Good deal, or better instant or 90 day access around??

Thanks in advance.

Glen_Clark

if you have to cash it in early losing 0.25% interest is no big deal is it.
But what about the Index Linking?

6022tivo

Glen_Clark wrote: »

if you have to cash it in early losing 0.25% interest is no big deal is it.
But what about the Index Linking?

My understanding is that I lose that for the part year, and 90 days behind.

bowlhead99

There are no other savings products I know of which have a government guarantee, tax free status, and guarantee to beat inflation.

At the moment inflation is projected to only be 2 point something percent in the next year, but this is just a target and the reality when averaged over 5 years could be very different.

One indicator of it being a good deal is that I can't go to NS&I and buy one of these myself. It's a potentially expensive form of 5-year borrowing for the government and these are not on general sale, they're only there as an option for existing holders maturing. So if you can afford to hang on, you maintain that status as someone who will potentially keep the right to take up the next issue, which might be much more lucrative than inflation plus 0.5. Whereas if you cash out you will be in my position of not being able to get in again.

Normally I wouldn't suggest locking yourself in for 5 years if you might need the money in less. However 90 days interest penalty (total interest is the 0.5% AND the index linking premium of 1-5%) is under 1/20th of the total tax free interest this would generate over 5 years, which in itself is a number that may be significantly higher than the net return you can get elsewhere. It doesn't make it something to walk away from on those grounds.

The 'no interest in the year it's withdrawn' sounds more punitive but perhaps you can time this to withdraw in the first month of one of the years. You have the T&Cs and I don't, and you know your personal circumstances and I don't.

For other options there are league tables of the some of the best savers around the internet including some on this site. The renewal offer sounds OK to me, but I don't know what other opportunities might come up in the next five years to take your fancy.

6022tivo

Great reasoning Bowlhead99, thanks, and you have helped me make the decision.

Glen_Clark

bowlhead99 wrote: »

At the moment inflation is projected to only be 2 point something percent in the next year, but this is just a target and the reality when averaged over 5 years could be very different..

Well Quite
The Bank Of England has had a 2% Inflation Target for the last 5 years, but Inflation has averaged about double that amount. In fact The Bank of England Inflation Target has so little credibility left there is talk of abandoning it altogether - link: http://www.moneyobserver.com/news/12-12-28/we-must-not-abandon-boes-inflation-target

PS: If its not very likely you will need the money in the next 5 years I would also suggest leaving it where it is.

6022tivo

Could some clever person do the calculation for me.

£15,000 in
£18,642 out
5 years
tax free
What was the interest actual percentage?

Thanks

Glen_Clark

6022tivo wrote: »

Could some clever person do the calculation for me.

£15,000 in
£18,642 out
5 years
tax free
What was the interest actual percentage?

Thanks

4.35% according to this savings calculator http://www.thisismoney.co.uk/money/saving/article-1633419/Monthly-lump-sum-savings-calculator.html

pem2

Approx 4.45%

bowlhead99

15000 x 1.0444 x 1.0444 x 1.0444 x 1.0444 x 1.0444 = 18639.

So you've earned about 4.44% a year. There is no tax so the net rate is the same as the gross rate of 4.44%.

If you had been a basic rate taxpayer who had used up all their ISA allowance and was investing in a regular bank account, you'd need to have been getting 5.55% gross a year before losing a fifth of it to tax and being left with 4.44%. For a high rate taxpayer the comparable gross amount is over 7%.

Of course, if you had spare ISA allowance you could have used that, and there were 5.5% 3-year fixes available on those back in 2008 when you took this out. But, you wouldn't have been able to reinvest the ISA after the three year fix for the remaining two years at the same attractive rate. And if inflation had run at 8%, the ISAs would have completely failed to protect the real value of your initial 15k, wheras the bond would have succeeded.

6022tivo

Many thanks.
I use my cash isa up every year, and it had to be tax free.
So not a bad deal really.