NS&I Index-Linked Savings rates

Biggles

http://www.nsandi.com/products/ilsc/rates.jsp shows the tax-free rate as:-
Index-Linking + 1.35%
Taking inflation as 4.5%, that makes the total return 5.85%. So far so good.

But where it shows 'equivalent gross rates', it shows them as
Basic: Index-Linking + 1.69%, Higher: Index-Linking + 2.25%

Taking that at face value, it means it's only worth 6.19% to basic-rate tax-payers, whereas I would have expected it to be worth 5.85 / 4 * 5 = 7.31%.

Surely, the index-linking is tax-free too, or is it only the interest?

malcolmlowry

I would have thought that the 1.35% guarantee would be tax-free and the equivalent rates quoted by NS&I are incorrect. Either way, it's not exactly clear whether the 1.35% is paid on the capital sum or if compounded, if this is based on the indexed investment annually or otherwise.

Also a point of interest, the 'current' RPI is not what you earn as this is a historic measure of the increase in general prices over the past year. It is the future increase in prices from the date you invest to the the end of the third year that counts. If inflation turns out to be lower you would earn less and you are stuck for three years without knowing what it will be.

It would be quite useful if Martin could clarify these points in the savings section for the wider audience.

In spite of this, for higher rate taxpayers in particular it is still probable that the index linked after tax return will turn out better than interest based savings accounts, unless bank interest rates go a lot higher and you have a trusted basic-rate or non tax payer spouse to look after your savings.

1swellfoop

I have been looking at the graph http://www.nsandi.com/pdf/ILSC_graph.pdf .

It seems to make no sense. According to the graph, over 10 years the index linked Savings Certificate has appreciated £1800 more than the RPI (original £5000 investment, i.e. an extra 36% total). Since they advertise that they are 1.3% PA better than RPI this makes no sense (1.3% compounded over 10 years is very roughly 14% total appreciation).

Am I being dumb?

shokadelika

1swellfoop wrote: »

I have been looking at the graph http://www.nsandi.com/pdf/ILSC_graph.pdf .

It seems to make no sense. According to the graph, over 10 years the index linked Savings Certificate has appreciated £1800 more than the RPI (original £5000 investment, i.e. an extra 36% total). Since they advertise that they are 1.3% PA better than RPI this makes no sense (1.3% compounded over 10 years is very roughly 14% total appreciation).

Am I being dumb?

Graph is showing re-invested cetificates at maturity WITH accrued interest.

ManAtHome

Rates 10 years ago were higher than they are now now (can't remember the numbers though).

david78

Biggles wrote: »

http://www.nsandi.com/products/ilsc/rates.jsp shows the tax-free rate as:-
Index-Linking + 1.35%
Taking inflation as 4.5%, that makes the total return 5.85%. So far so good.

But where it shows 'equivalent gross rates', it shows them as
Basic: Index-Linking + 1.69%, Higher: Index-Linking + 2.25%

Taking that at face value, it means it's only worth 6.19% to basic-rate tax-payers, whereas I would have expected it to be worth 5.85 / 4 * 5 = 7.31%.

Surely, the index-linking is tax-free too, or is it only the interest?

Coming back to Biggle's original post. The gain due to index linking is indeed tax free. So if you want to calculate the equivalent rate you would need to get in a standard (taxed interest) savings account, they should be worked out as follows:

(4.5% + 1.35%) / 0.8 = 7.31% for a basic rate tax payer
(4.5% + 1.35%) / 0.6 = 9.75% for a higher rate tax payer.

I think the term "index linking" on the NS&I website is a different amount for basic rate and higher rate tax payers.

An equivalent ISA account (non-taxed account) would obviously have to pay 5.85%.

Biggles

david78 wrote: »

I think the term "index linking" on the NS&I website is a different amount for basic rate and higher rate tax payers.

That's the assumption that must be made, I think, you have to read something into the expression 'Index-linking' that isn't actually printed there.

With regard to the graph, I can't see that it makes sense either.

I don't think either rates being higher 10 years ago or the reinvestment after 5 years affect it to that extent.

But the fact is it's showing the interest addition as being worth more than the index-linking element (£1,800 v £1,400). I don't have any of the earlier rates to hand but I tend to doubt that the interest element ever exceeded the index-linking. And if it did, that's not the case now so is no longer relevant.

Slim

The graph can be just about explained by the effect of compounding the returns.
Before interest the inflation increase over 10 years is about £1,400 on the graph, this equates to an average inflation rate of just about 2.5% per year - about right.
The total return, inflation plus interest, over 10 years is about £8,180. This equates to an average annual increase of 5.05%. The average annual interest to achieve this is therefore 2.55%. With the higher interest rates in the earlier years this doesn't seem unreasonable.
Or am I missing something?

nrsql

malcolmlowry wrote: »

If inflation turns out to be lower you would earn less and you are stuck for three years without knowing what it will be.

You can cash in any time after 1 year and still get interest. You get nothing durng the first year. The amount above RPI increases over the 3 (or 4) years but you still get a good return after the first year.

IGK

david78 wrote: »

Coming back to Biggle's original post. The gain due to index linking is indeed tax free. So if you want to calculate the equivalent rate you would need to get in a standard (taxed interest) savings account, they should be worked out as follows:

(4.5% + 1.35%) / 0.8 = 7.31% for a basic rate tax payer
(4.5% + 1.35%) / 0.6 = 9.75% for a higher rate tax payer.

I think the term "index linking" on the NS&I website is a different amount for basic rate and higher rate tax payers.

An equivalent ISA account (non-taxed account) would obviously have to pay 5.85%.

Yes the "Equivalent gross rates" column on the NS&I website isn't very clearly written. It takes for granted the index-linking is tax-free then grosses up the fixed interest portion. I suppose it doesn't give the 7.31% and 9.75% (combined RPI + interest) rates because the 4.5% inflation rate is historical and therefore not guaranteed, so to use a historical inflation rate would be misleading.