Cashing in NS&I index linked certificates. Which little piggy?

bowlhead99

afwone wrote: »

The other thing going round in my head, is what is the true market value of an ILSC were it possible to think in those terms.

redbuzzard wrote: »

Re your attachment to the ISA wrapper - don't forget the tax free status of ILSC too, which has value even as a lower rate taxpayer.

The theoretical value of an ILSC to you as an individual is higher than it costs you to buy and higher than what you can cash it in for. It's difficult to describe this as a "true market value" because there isn't a market in them where you can buy and sell to other people so its 'true' value is of course exactly what you pay or get on redemption. But inherently it's valuable because there is no other product that offers the same and not everyone can buy them, so if these could be traded on a 'secondaries' market there would be people who would buy a pound's worth off you at more than a pound.

NS&I are offering RPI plus 0.15, tax free. My only goal for cash in my investment portfolio is for it to maintain its value in real terms while I save it for rainy days or for buying other investments with it when they are cheaper. So given what is available from banks on savings deposits at the moment I would very happily accept RPI plus zero. Or, to be honest, RPI minus 0.15, or even less would be fine too in the current environment given what a bank could offer on their equivalent fixed term savings product.

And the tax-free element is of course a game-changer because there are UK individuals with 40, 45 or 60% marginal income tax rates who have maxed their ISA allowances and would love something which could go up in value 2%+ in a year with a government guarantee on preserving your principal and not have to pay tax on the interest received.

If it were possible for you to sell £1000 nominal of 3 or 5-year bonds, just acquired from NS&I, to me, I'd happily pay over £1000 for them. £1005? £1010? Obviously if your only other option is to cash them in and take a penalty then perhaps you'd accept under £1000 for them. A 'grey market' would develop based on the supply and demand but with a large amount of demand you would definitely be able to offload them for over £1000, if the market price of index-linked gilts is anything to go by - so people taking them off your hands would get a negative real yield. Which they would accept because it's still better than getting 1.5% from a bank and receiving under 1% after the tax bill is paid.

redbuzzard

bowlhead99 wrote: »

The theoretical value of an ILSC to you as an individual is higher than it costs you to buy and higher than what you can cash it in for. It's difficult to describe this as a "true market value" because there isn't a market in them where you can buy and sell to other people so its 'true' value is of course exactly what you pay or get on redemption. But inherently it's valuable because there is no other product that offers the same and not everyone can buy them, so if these could be traded on a 'secondaries' market there would be people who would buy a pound's worth off you at more than a pound.

Precisely.

If you look at the price of index linked gilts with similar maturities, and adjust the redemption value of your ILSC to the same prospective yield assuming inflation at say 3%, you will find that the ILSCs are "worth" today, at a guess, a couple of percent more than you will receive, for every year remaining.

That in my view still undervalues them. If they were ILGs, the price you would pay would be higher than you will get for your ILSCs - yet, you could still lose money on ILGs if market yields rise - you can't lose money with your ILSCs.

I'd buy them from you if I could.

afwone

This is all sound advice. I had thought that seeking your opinions here would avoid me having to exercise my brain, but now my head is spinning. No easy options as far as I can see.

I get the impression from the views expressed that the ILSC are considered with more favour than shares or bonds in an ISA. That said is now the best time to offload shares or bonds? It may well be irrational, but a shame to sell something that was worth quite a bit more a few weeks back. I know that I should have started coming out of the market in stages to hedge my bets.

Decisions now have to based on the chances of a stock market rally or on the potential of ILSC to gain value against the cost of penalties for cashing them in. For both ISA and ILSC, there is the question also of the value of their tax-exempt status, and that ultimately will come down to how my fortunes will fare in the years ahead. None of these are particularly clear to me.

kidmugsy wrote: »

"How very courageous, Minister" as Sir Humphrey would have said.

I am inclining towards being courageous, at least as part of the solution. Put it down to my new found taste for financial irresponsibility. Taking a loan at 3.4% would allow decisions to be postponed for now. There must be a reasonable chance that the ILSC will generate returns of 3.4% over the next couple of years, and at the very least I will have the chance to cash them in at a more favourable time.

redbuzzard

Well you could still phase your sales, though I suppose if you want to spend the £50k or whatever now, in one go, that doesn't really work.

You're still thinking in £ terms, not real terms. You know exactly what the return on ILSC's will be in real terms, 0.15% - 0.5% or whatever.

If I were your friend, I'd be trying to do a deal where I lent you today's cash-in value of some of your ILSC's and you paid me back the proceeds of those certs when they mature. He is then guaranteed the preservation of his capital, plus a bit, and you are guaranteed not to have a shortfall on the proceeds when you cash in to repay him. Everybody wins.

On the other hand, if I were you, I'd probably liquidate some of the other stuff, starting with the bonds which everybody seems to think have more down potential than up, from here.

None of that is advice, just conversation

kidmugsy

afwone wrote: »

Taking a loan at 3.4% would allow decisions to be postponed for now. There must be a reasonable chance that the ILSC will generate returns of 3.4% over the next couple of years, and at the very least I will have the chance to cash them in at a more favourable time.

In that case, why not arrange to repay the loan in stages, each repayment to happen about three weeks after a new-style ILSC's anniversary date. That way you'll have minimal penalty for cashing them in.

afwone

redbuzzard wrote: »

If I were your friend, I'd be trying to do a deal where I lent you today's cash-in value of some of your ILSC's and you paid me back the proceeds of those certs when they mature.

Unfortunately the people I hang out with would be uncomfortable with anything more complicated than a deposit account. It would have to be a clearly undersood interest rate. Should still be possible to arrange something where we both win.

kidmugsy wrote: »

In that case, why not arrange to repay the loan in stages, each repayment to happen about three weeks after a new-style ILSC's anniversary date.

You are right. Having an early exit or a phased repayment could be useful for both parties. Tomorrow I shall draft an agreement and see if we can seal a deal where we are both comfortable. If not, then next week I shall begin liquidating tax efficient investments, guided by the thoughts of contributors to this thread.

This all started with me throwing financial caution to the wind and committing to a fe ckless lifestyle. With the sage advice offered here, I feel that I am at least being irresponsible in the most prudent way.